Back in 2001, Congress changed the law on estate taxes, developing estate tax exemptions that changed 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 on the amount 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. Even though your estate may not go through federal estate tax if you were to pass in 2010, your estate will not get a “stepped up” basis because year. In other words, 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 set up 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Despite that there is only one year left prior to the federal estate tax is repealed and then bounce back with a $1 million exemption and a higher leading tax rate, Congress has failed to act. Some years earlier, there was a movement to abolish the federal estate tax altogether, as the idea was that an individual paid taxes of numerous ranges all their lives and ought to be allowed to transfer the balance of their properties tax free to their kids. In spite of this fact, Congress rather participated in this compromise and has failed to position estate tax reform on the front burner.
This absence of action by Congress has caused people to be on a roller coaster, having to monitor their account fluctuations on an annual basis to figure out how the law because year will apply to them. The standard wisdom was that Congress would act sometime before the 2010 reset of the exemption to make a more irreversible reform. In March, some members of the Senate Finance Committee stated a spending plan resolution that included a nonbinding change that would freeze the estate tax at 2009 levels, indicating that $3.5 million worth of an estate would be exempt (or $7 million for a couple, if effectively structured). The remainder of the estate above the exemption would then be taxed at 45 percent. There have been a variety of other propositions advanced, some of which are more generous federal estate tax exemptions.
Until Congress acts, be prepared to ride the roller coaster!