Federal Estate Tax Legislation

The U.S. Congress may yet act before the year is out to extend or change the federal estate tax. If not, the 2001 legislation that has established exemptions and tax rates through this year is scheduled to expire for the year 2010. Then, in 2011, the exemptions and rates will revert to their pre-2001 rates. Here are the differences:

For persons dying in 2009, the last year of the 2001 legislation, an estate worth up to $3.5 million is exempt from federal estate tax, and from there tax is applied on the excess at graduated rates up to a top rate of 48%. After the one-year repeal, for persons dying in 2011, the exemption will be $1 million, with a top tax rate of 50% on larger estates.

Of course, Congress may act at the last minute to extend the current law in the short term, or enact something new. The uncertainty makes it all the more important for persons with potentially taxable estates to plan to take advantage of whatever exemptions may be available. (These changes do not affect Maryland’s estate tax structure, which has a $1 million exemption but a much lower tax rate on the excess.)

Typically the way estate tax planning is done, at least for married couples, is to provide in their Wills for the creation of a trust upon the first death for the benefit of the survivor. The survivor usually has an absolute right to distributions of income, sometimes small distributions of principal, with the rest subject to the trustee’s discretion to distribute more subject to the health, maintenance and support needs of the survivor. Upon the death of the surviving spouse, the trust is not part of his or her taxable estate, and what remains in the surviving spouse’s estate is subject to available federal and state estate tax exemptions. In this way, estate tax exemptions are applied to the assets of each spouse.

The trust created for this purpose can be funded upon the first death with a specific amount, such as the available federal exempt amount or the Maryland exempt amount. In the alternative, the Will can provide that such a trust is created and funded only to the extent the surviving spouse disclaims any of the estate initially passing to the surviving spouse. This approach provides for maximum flexibility for dealing with the uncertainties of the future estate tax.

Congress has been discussing the future of the estate tax, though no clear direction has emerged as yet. Even persons who believe they would not be subject to estate tax should consider tax planning because their assets may increase in the future and the available exemptions may change.

For more information on this topic, please contact Jay Merwin at Merwin@bowie-jensen.com.