Impact Of Federal Estate Tax Changes On Estate Planning

Legally reviewed by:
Rubin, Glickman, Steinberg & Gifford P.C.
April 24, 2020

In 2001, President George W. Bush came to office with the promise of large tax cuts. One of his first acts as president was signing $1.35 trillion in cuts, phased in over the next ten years. Part of that legislation included a gradual reduction of the Federal Estate Tax to be followed by a one-year repeal in 2010. This law, however, also included a sunset provision where the tax cuts, together with the Estate Tax repeal, would expire in 2011.

After President Obama took office, there was some uncertainty about whether the tax cuts would be extended after the sunset at the end of 2010. As the expiration date approached, many wondered if lawmakers would allow the tax rates to return to 2001 levels especially as the United States faced a soaring budget deficit.

This past December, President Obama and Congress agreed to a compromise to extend the Bush tax cuts for two years. The deal included some changes to the Federal Estate Tax law. Instead of reverting to 2001 levels which provided for a $1 million Estate Tax Exemption and a tax of 55 percent on the amount above the exemption, the new law will provide for a $5 million Exemption and a 35 percent tax rate on the amount above the Exemption.

This provision was more generous than many experts predicted. Many observers expected the 2009 rates of a $3.5 million Exemption and a 45 percent tax rate to be reinstated. This new law, however, is set to expire again in two years, leaving the estate planning needs of many people uncertain.

Further complicating the issue is that beneficiaries of those dying in 2010 have two options to consider when paying estate taxes. Heirs can choose to follow the 2010 law, using an artificial step-up basis with no Estate Tax or use the new 2011 tax provisions.

While the Estate Tax can have a significant impact on large estates, other provisions in the tax code can affect estates that have far fewer assets. The law is set for the next two years, but what will happen beyond that time is uncertain. It is important to not only discuss your current estate plan with an experienced estate planning attorney, but to periodically revisit the plan as laws and tax rates may change.


Legally reviewed by:
Rubin, Glickman, Steinberg & Gifford P.C.
Pennsylvania Attorney's
April 24, 2020
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