The Estate Tax: Should We Care?

September 7, 2010

The Federal Estate Tax has been in the news a great deal lately, mainly because there exists a great uncertainty as to its future. However, a high majority of citizens will never owe it, because one’s estate must be valued at quite a high level before any tax is imposed.  For example, up to one’s first $3.5 million was exempt in 2009, leaving more than 99% of all estates exempt from the tax.

Additionally, the tax does not exist for the year 2010.  As a result of a stalemate in Congress, it has been estimated that the U.S. treasury will lose approximately $15 billion of revenue due to the expired estate tax this year.

For your further review, a fascinating series of recent guest posts on the blog illustrate the passionate arguments between supporters and opponents of the tax.

So what’s the big deal?  Why do we care about a tax that will be charged to less than 1% of us?  The truth is if your assets, including your home, your retirement, and life insurance (as discussed in this earlier post) will never total about $1 million, then you do not have to be too concerned with estate taxes beyond intellectual interest.

Otherwise, you might watch Congress over the next few months to see the impact on the following tax issues:

  1. New Exemption Amount — If Congress does not agree by the end of the year, the estate tax will revert to pre-2001 levels.  This means that after your first $1 million of assets, your estate will be taxed at rates graduating up to 55%.  If this happens, you might need to make estate planning a more active concern to avoid a potentially huge tax bite, given the impact of your home, retirement and insurance on your net worth.  Obviously, a higher exemption amount will impact fewer people, but surely keep your eye on this.
  2. Step-up in basis – Prior to this year, if you inherited someone else’s property, you would be able to receive a full “step-up” in its basis from the date of their death.  For example, say your relative bought stock for $25,000, and then it rose to $100,000 on the day of the relative’s death.  If you inherited that stock, you could treat it as if you had bought it for $100,000, and then sell it free of capital gains taxes (since you would essentially have no gain on the stock).
    • This year (2010), however, the “step-up” rules are somewhat limited.  Instead of a total step-up, the rules “only” allow up to a $1.3 million step-up in basis, plus an additional $3 million step-up if left to a spouse.  If this is further limited by Congress, obviously more people will be directly affected.
  3. State estate taxes — While the Feds eliminated estate taxes this year, state estate taxes may still apply to you.  For example, Maryland has a 10% inheritance tax (essentially for non-family inheritors), and a 16% estate tax on estates exceeding $1 million.
  4. Gifting — Essentially, your total lifetime gifts that exceed $1 million (not including allowable annual gifting of $13,000 to any person) are currently subject to a 35% gift tax.  If Congress does not have a new agreement by the end of the year, then this amount will increases to up to 55% for 2011 and beyond.  This gives some an opportunity to gift property for possibly 20% less in taxes, but this also involves the gamble of assuming Congressional inaction.
 The Estate Tax: Should We Care?


Scott R. Zucker, Esq. is the owner of The Zucker Law Firm PLLC, located just outside the Capital Beltway in Annandale, within five miles of the City of Fairfax, the county seat of beautiful Fairfax County, Virginia. The firm focuses mainly on estate planning services for Virginia, Maryland and Pennsylvania clientele, and seeks to do so in an affordable and approachable way. People interested in learning more can contact Scott by phone or email.

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