Federal Budget Proposal Gives Hints on Future Estate Tax Rates

Dear Mr. Premack: I read that President Obama has just released his budget proposal for next year. Your earlier columns said that the current federal estate tax law will expire at the end of 2012. What is the status of the estate tax for next year? Does the budget proposal give us any hints as to what we may see out of Congress? – C.W.

This is a political process, in a highly charged political year. Right now, the estate tax exemption is $5.12 million and the top tax rate on amounts exceeding the exemption is 35%. Those rates will automatically expire by law on December 31, 2012. Congress and the President must pass a new law setting new rates (or keeping these rates); if they do not, then the exemption automatically returns to $1 million and the top tax rate returns to 55%.

The 2013 budget proposal from the President asks Congress to set the 2013 exemption at $3.5 million, with a top tax rate of 45%.

There are three pieces of good news that emerge from the President’s estate tax proposal. First, the proposed $3.5 million matches the amount that the White House sought during the last vote in 2010 when the President eventually agreed to the current $5 million exemption. The White House is thus in favor of avoiding a total roll-back to the $1 million default exemption. Second, an estate tax rate that lasts for only two years does not allow for long-range planning. The budget proposal seeks to set the tax rate on a long-term basis, not just for another two years. Finally, the proposal seeks to retain the current law’s portability provision: that a married couple can combine their exemptions if they take proper legal action.

This proposal is far from the final word. Congress will begin debate and some type of compromise over the estate tax (and a large group of other taxes) may be reached. As the election draws closer, the likelihood of compromise diminishes. We may not see a final vote until December 2012.

Paul Premack is a Certified Elder Law Attorney practicing estate planning and probate law in San Antonio.

Original Publication: San Antonio Express News, February 20, 2012

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