Estate Tax Planning and Legislation

Estate tax planning is one of the most important things the owner of an estate can do to preserve as much of his/her assets and wealth as possible for the heirs and beneficiaries of the estate.  Without proper estate tax planning, the Internal Revenue Service (IRS) can take a bigger portion of any estate, as shown in federal inheritance tax ( probate tax ),by leaving less for the intended heirs.

In 2001, Congress enacted legislation that lowers the estate tax incrementally until 2010 when it becomes completely eliminated for one year.  However, the legislation expires in 2010and in 2011 the rate will revert back the rate prior to 2001. The legislation does not affect the estate tax rate table, but it does gradually reduce the maximum tax rate from 55% to 45%.

The legislation also raises the estate tax exemption levels from $1.3 million before the legislation was passed to $3.5 million by 2009.  In 2010, estate taxes are completely eliminated but only for that year.

Unless another bill is passed, in 2011 the estate tax exemption level returns to $1 million for individual estate tax exemption and $1.3 million estate tax exemption for family-owned businesses.  The tax rate will also return to its original maximum rate of 55 % with 5 % surtax on estates over $10 million.

The estate tax legislation works like this:

• An estate worth less than $2 million in 2008 pays no estate taxes
• Any amount over $2 million in 2008 is taxed at a rate of 45%
• An estate worth less than $3.5 million in 2009 pays no estate taxes
• Any amount over $3.5 million in 2009 is taxed at a rate of 45%
• The estate tax is completely eliminated in 2010
• An estate worth less than $1 million in 2011 pays no estate taxes
• Any amount over $1 million in 2011 is taxed at a rate of 60%

The state tax exemption can be reduced if the estate owner has used any gift exemption.  An estate owner is allowed to make gifts of $12,000 for a single individual and $24,000 for a married couple.  Any amount over these exempt amounts will be reduced from the estate tax exemption permitted.