Where the federal estate tax will go beyond 2009 is entirely up in the air. Under current law, the tax is scheduled to change as follows:
- 2009 - $3,500,000 exemption, 45% tax rate
- 2010 – No estate tax
- 2011 and beyond - $1,000,000 exemption, 55% tax rate
But today no one really believes that the estate tax will be allowed to simply vanish in 2010. Instead, what will happen with the federal estate tax beyond 2009 will depend on what President Obama and Congress decide to do with it.
What Will Happen Under Obama’s Administration?
During the months preceding the election, then Senator Obama was against full repeal of the federal estate tax and instead favored a $3,500,000 exemption and 45% tax rate, which happen to be the exact same numbers that have taken effect in 2009. (For the sake of comparison, John McCain favored a $5,000,000 exemption and 15% tax rate). In fact, during his campaign, Obama supported making the 2009 numbers permanent in 2010 and beyond. But keep in mind that Obama's plan for the estate tax was formulated early on in his campaign and long before our current economic crisis and series of bank and business bailouts.
Now that the election is long over, there are two very different paths for Obama and Congress to take. Their first option is to make a quick fix sometime in 2009 to eliminate full repeal of the estate tax that's scheduled to take place in 2010, and then in future years make a series of "one year patches" that will either raise or lower the estate tax exemption and rate based on the government's current monetary needs.
Their other option is to make a quick fix sometime in 2009 to elminate full repeal but then take the time to study and implement a permanent estate tax exemption and rate that will meet the government's current and projected monetary needs.
In these trying economic times, the former scenario is coming closer to reality: One Year Patch Likely to End Estate Tax Repeal in 2010.
What if the 2002 Estate Tax Exemption and 2001 Estate Tax Rate Are Allowed to Come Back?
What if the projected future of our economy causes President Obama and Congress to reconsider the 2009 numbers - a $3,500,000 estate tax exemption and 45% estate tax rate - and instead they allow the estate tax exemption and rate to revert back to what they were prior to President Bush's changes in 2001? As mentioned above, this is exactly what is scheduled to happen in 2011 - a $1,000,000 exemption and a 55% tax rate - unless Obama and Congress take action soon.
What would the reversion of the estate tax back to 2001/2002 numbers mean for you and your loved ones? If your net estate is valued at $3,500,000, then using the 2009 numbers, your estate won’t owe any estate taxes. Contrast this with the estate tax that will be due if the numbers are allowed to revert back to the 2001/2002 numbers - your estate tax liability will be $1,375,000 instead of $0.
That's a big difference, isn't it? And Obama and Congress will surely take note. So don't be surprised if the federal estate tax not only sticks around for years to come but ends up taking a significant chunk out of your beneficiaries' pockets.
Chart Showing Federal Estate Tax Exemption: 1997 - 2009