San Antonio Express-News
June 20, 2006

Estate Tax Rates and Proposals

copyright 2006, Paul Premack

Dear Mr. Premack: I would appreciate if you could give me information on estate taxes. How much must be paid? How long does an estate have to pay it? Thanks, LJE

Federal estate taxes have been in the news lately as the US Senate debates what changes to make, or whether to leave the current system intact. They recently voted against outright repeal of the estate tax, but some history is necessary to understand the impact of that vote.

Before Congress passed sweeping change to the federal estate tax system in 2001, the tax was imposed on any estate larger than $675,000. Various legal planning techniques could help protect twice that amount if a married couple had their estate lawyer draw up the right documents. Exposed assets were taxed at 50%, and in the case of very large estates at even higher rates. Thus the estate tax was of concern to millions of American taxpayers.

When the law was changed in 2001, Congress increased the exemption to $1 million and allowed it to phase up over the years to today’s $2 million exemption. The exemption will expand again in 2009 to $3.5 million, and in 2010 it will be unlimited (so there is no estate tax for anyone who dies in 2010, even a billionaire). At the same time, Congress reduced the rate of tax from 50% to its current 46% level. As a result, there are far fewer Americans who have to worry about paying any estate tax at all.

However, Congress made those tax reductions temporary. If they don’t take action, the estate tax rate will go back up to 50% and the estate tax exemption will go down to $1 million in 2011. The US House of Representatives has already voted to simply make the 2001 changes permanent, but the Senate has taken that position that elimination of the estate tax is not affordable.

The Senate may try to reach a compromise with the House. Senator Kyl (R-AZ) has proposed setting the estate tax exemption at $5 million and lowering the top tax rate to 15 percent. Political wrangling may set the limits at a different level or may scuttle any type of compromise as midterm elections drawn nearer. As Congress fiddles, Americans are left with a great deal of uncertainty over how to best set up their estate plans.

Despite all the uncertainty over exemptions and rates, the law has been steady in regard to the unlimited marital deduction. Any assets of any value that pass to a surviving spouse are free of federal estate tax. While that sounds good, it is really nothing more than a deferral of tax until the second spouse dies. To reduce or eliminate estate tax at the second death, spouses can use a bypass trust (sometimes called an A-B trust or a Shelter trust) – but it must be activated on the death of the first spouse.

When an estate is large enough to owe estate tax, the tax must be paid within 9 months of the date of death. Some extensions are allowed for good cause, and if at least 35% of the estate’s value is a farm or small business then the tax can be paid in installments over 10 years. Since the extension and installment rules are found in the Internal Revenue Code they are convoluted, so anyone facing this problem should be sure to hire an experience CPA and a qualified tax attorney to be sure things are handled correctly.