As we approach the end of 2010, there is a nagging problem in most people's financial plans that looks like it will not be resolved by the end of the year: the estate tax. The estate tax is scheduled to be repealed as of January 1, but only for 2010. In 2011, it's scheduled to return, at an even higher rate than it's at now. All these changes are likely to play havoc with the type of estate planning that people have invested years of time and money in.
Here's how we got to this place: There was a law called the Economic Growth and Tax Relief Reconciliation Act, passed in 2001, that slowly phased out the estate tax. The exemption gradually increased from $1 million per person ($2 million for families) to the current $3.5 million ($7 million for families), while the tax rate fell from 55 percent to 45 percent. And the law allowed the estate tax to end completely in 2010 - after which the law itself would expire as well.
Lawmakers back in 2001 were scared by how future deficits would look after the permanent loss of revenue from eliminating the estate tax, which is why they didn't remove it for good. They just kicked the can down the road and figured lawmakers ten years hence could take on that responsibility. Now here we are, with ten days left in the decade, and nothing has been done. And if nothing gets done, after an estate-tax-free year in 2010, the figures automatically return to their 2001 levels in 2011: a $1 million exemption and a 55 percent tax rate.
It's a bit of a mess, and something no one seems happy with, either Republicans or Democrats. But at the same time, no one has stepped forward to fix it. Tomorrow, we'll talk about what an unchanged tax situation could mean for your estate in 2010, and what might happen in the years to come.
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