Author(s): M. Sean Fosmire

What will happen with estate taxes?

In the early years of the first Bush Administration, Congress passed a series of tax relief measures which included a progressive loosening of the estate tax laws. At the time that these laws were passed, the “exemption amount”, the amount which one person could leave to his or her heirs without having to be concerned about imposition of Federal estate taxes, was $675,000. Over the next several years, this exemption amount was increased, and modest modifications to the estate tax rate were made.

For the last two years, 2007 and 2008, the exemption amount has been $2.0 million per person. According to the schedule that is currently in place, the following will happen in the next three years:

  • In 2009, the exemption amount will be $3.5 million per person.
  • In 2010, the estate tax will be repealed in its entirety. Persons dying in 2010 will be able to leave an unlimited amount to their intended heirs, free of any concern for estate taxes.
  • In 2011, the entire law will “sunset”, and the estate tax will be restored, with a $1 million per person exemption amount.

At each level, by the use of carefully crafted and properly funded credit shelter trusts, the applicable per-person exemption amounts can be doubled for a married couple.

For the last year, we have been advising our clients that this system will need to be revised, and that Congress would not dare to do anything at any time during the 2008 election year. Thus, it is a virtual certainty that the current system and the current schedule as described above will be modified sometime during the next year. We believe that it is most likely that the one-year hiatus for 2010 will be repealed and that the estate tax will be made permanent with a per- person exemption amount higher than the $1 million amount scheduled to go into effect in 2011.

Knowledgeable observers have suggested that there is a good deal of political support for an extension of the $3.5 million per-person exemption amount, and an estate tax rate of 45% on amounts above that figure. That appears to be the resolution that has the support of Barack Obama.

We recommend that our clients monitor Congress as it addresses these issues in 2009. Once a final determination is made as to the exemption amount that will apply after 2010, those who have total countable assets – including such things as life insurance death benefits – in excess of or approaching the per-person exemption amount should return to see us for further consultation and planning.

We wish a happy holiday season to all.

M. Sean Fosmire 1440 West Ridge Street Marquette, Michigan 49855 (906) 226-2524