Back in 2001, Congress altered the law on estate taxes, developing estate tax exemptions that altered over the years. 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 upon 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 abolished for a year. Although 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. In other words, your estate is “trading” the federal estate tax for the capital gains tax because one year.
As this law now exists, in 2011, the federal estate tax exemption is scheduled to come back at the $1 million
Despite that there is only one year left prior to the federal estate tax is repealed and then bounce back with a $1 million exemption and a higher leading tax rate, Congress has actually failed to act. Some years earlier, there was a motion to eliminate the federal estate tax entirely, as the idea was that a person paid taxes of lots of varieties all their lives and must be allowed to move the balance of their properties tax free to their children. Despite this truth, Congress rather entered into this compromise and has stopped working to put estate tax reform on the front burner.
This absence of action by Congress has actually triggered individuals to be on a roller coaster, needing to monitor their account variations on an annual basis to determine how the law because year will apply to them. The conventional knowledge 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 Financing Committee stated a spending plan resolution that included a nonbinding change that would freeze the estate tax at 2009 levels, suggesting that $3.5 million worth of an estate would be exempt (or $7 million for a couple, if correctly structured). The remainder of the estate above the exemption would then be taxed at 45 percent. There have been a number of other proposals advanced, a few of which are more generous federal estate tax exemptions.
Until Congress acts, be prepared to ride the roller coaster!