President Obama is currently pitching a tax cut program that includes substantial changes to existing federal estate tax laws, including: exempting estates valued at under $5.0 million from federal estate taxes and setting the maximum estate tax rate at 35 percent. Under this plan, couples could potentially pass up to $10.0 million to their children and other heirs without paying federal estate taxes.
The reason that president Obama is trying to push this legislation through now is because the President Bush tax cuts enacted in 2001 are set to expire at the end of this year. Similar to the Bush tax cuts, if the Obama tax cuts expire in 2012 then pre 2001 tax laws apply.
The proposed changes are significant since under current law the 2011 exemption level is $1.0 million per individual. The maximum tax rate will be 55 percent in 2011 if the House and Senate fail to approve President Obama’s tax cut program. Many house democrats are upset over the agreement reached between President Obama and House Republicans since these changes are perceived to benefit only the wealthy and strip the government of a substantial revenue source. In response to President Obama’s tax cut program, Democrats have proposed changes to the federal estate tax landscape that would increase the federal estate tax exemption level to $3.5 million per individual and the maximum tax rate to 45 percent. Essentially, the Democrats’ proposed change is equivalent to the 2009 federal estate tax laws.
No matter what changes, if any, are approved, the proposed changes will not be retroactive. This means the estates of individuals that died in 2010 will not owe any federal estate taxes, such as George Steinbrenner’s estate.
Unfortunately, Obama’s tax cuts are only temporary; expiring in two years.
Note that the federal changes do not affect state estate/inheritance tax laws unless you reside or have property in a state with estate tax laws tied to the federal estate tax laws. In Oregon, a taxable estate continues to be an estate worth over $1.0 million. If you have property in Oregon and your gross estate (not just the property located in Oregon) is over $1.0 million then your estate may owe Oregon inheritance taxes and not owe federal estate taxes under the proposed legislation. Washington’s exemption level is currently $2.0 million. Neither state is likely to increase its exemption levels in the future since both states are hurting financially.
President Obama’s proposed estate tax cuts won’t affect most people and are a small band aid covering a large wound. If approved, the legislation continues the unpredictability of estate planning since we, as planners, do not know what the legislature will do in 2 years.