For Your Own Good Understanding Michigan Estate Planning

Oct 19 2010Some Movement on Estate Tax Legislation

As a result of the 2001 tax legislation, the estate tax exemption had grown from $1 million in 2001 to $3.5 million in 2009.  This year is the last year affected by the 2001 Tax Act, which resulted in a complete repeal of the estate tax for 2010.  As a result of Congress not having sufficient votes in the Senate to make the tax law permanent, the 2001 Tax Act expires at the end of this year and the estate tax returns at the beginning of next year with an exemption equal to what it was in 2001 ($1 million).  Most estate planners believed that Congress would have taken action before the end of 2009 to change the law so that the estate tax would not go away, resulting in the government losing all of the estate tax revenues from individuals dying in 2010. 

Certainly most Democrats and Republicans believe that an estate tax should not come back with an exemption of only $1 million since that would require estate tax planning to be undertaken by even young couples with life insurance, retirement plans, and a residence.  President Obama, before and after his election, indicated that he thought a $3.5 million estate tax exemption with a cost living adjustment would be appropriate. 

For many months now, nothing has really been mentioned about changes to the estate tax laws.  However, recently a group of Republican Senators introduced a Bill that would retroactively raise the estate tax exemption to $5 million and reduce the top estate and gift tax rate to 35%.  For executors of estates of individuals who died in 2010, the law would allow them to elect whether to be taxed under this new estate tax law or under the present 2010 rules because there are different tax basis rules applicable in 2010 and 2011. 

We will have to wait to see if action is actually taken and a law is adopted before the end of this year.  Most estate planners believe that there should at least be a $3.5 million estate tax exemption in place.  With an exemption of $3.5 million, and through appropriate planning, a married couple could protect as much as $7 million from estate taxes.