Estate Tax Set to Die, Then Re-emerge

The federal estate tax will likely be repealed for one year starting on January 1, 2010, but will then reappear in 2011 under its previous 55% tax rate on anything above $1 million. Efforts to pass a SEMA-supported bill to permanently freeze the estate tax at its current 45% rate on amounts above $3.5 million/individual ($7 million/couple) failed in the U.S. Senate. The House passed the bill in mid-December.

Under President Bush’s tax cuts of 2001, the so-called “death tax” has been gradually reduced in advance of the 2010 repeal. However, during the last nine years lawmakers have been unable to agree on a permanent status for the tax. A stalemate emerged between lawmakers who wanted to abolish it altogether and those who wanted to retain it at modified rates. Among other stumbling blocks, lawmakers have been unable to identify other sources of revenue to replace income derived from the tax, about $25 billion for 2009.

SEMA and a number of other associations formed the “Permanent Estate Tax Relief Now Coalition” to urge Congress to resolve the issue. The Democrat leadership may seek to pass the House bill in early 2010 and apply it retroactively to January 1, but it is unclear whether that effort will be successful.

The forthcoming repeal will not benefit many smaller estates during 2010. Instead of an exemption and a fair market value stepped-up basis for the appreciated assets, the heirs will receive the assets with a carry-over basis at their original value. The capital gains tax on any sale of the assets could be substantial. For more information, contact Stuart Gosswein.