Back in 2001, Congress altered the law on estate taxes, producing estate tax exemptions that changed over the years. For example, in 2008, the exemption from federal estate tax is set at $2 million. If you have one dollar more than that number, your excess will be taxed at 45 percent plus, depending on the quantity of the excess.
According to this legislation, the federal estate tax exemption amount was to increase in 2009 to $3.5 million and in 2010, the federal estate tax was eliminated for a year. Despite the fact that your estate might not go through federal estate tax if you were to pass in 2010, your estate will not receive a “stepped up” basis because year. To put it simply, your estate is “trading” the federal estate tax for the capital gains tax in that one year.
As this law now exists, in 2011, the federal estate tax exemption is arranged to come back at the $1 million
Despite that there is only one year left prior to the federal estate tax is reversed and then bounce back with a $1 million exemption and a higher leading tax rate, Congress has failed to act. Some years ago, there was a movement to abolish the federal estate tax completely, as the idea was that a person paid taxes of lots of varieties all their lives and should be permitted to transfer the balance of their properties tax complimentary to their kids. Regardless of this fact, Congress instead got in into this compromise and has actually stopped working to position estate tax reform on the front burner.
This lack of action by Congress has actually caused people to be on a roller rollercoaster, having to monitor their account changes on an annual basis to identify how the law because year will apply to them. The conventional wisdom was that Congress would act at some point before the 2010 reset of the exemption to make a more irreversible reform. In March, some members of the Senate Finance Committee stated a budget plan resolution that consisted of a nonbinding change that would freeze the estate tax at 2009 levels, meaning that $3.5 million worth of an estate would be exempt (or $7 million for a couple, if properly structured). The remainder of the estate above the exemption would then be taxed at 45 percent. There have been a number of other propositions put forward, a few of which are more generous federal estate tax exemptions.
Until Congress acts, be prepared to ride the roller coaster!