Update on the Federal Estate Tax

THE TAX RELIEF, UNEMPLOYMENT INSURANCE REAUTHORIZATION AND JOB CREATION ACT OF 2010

As we went off on winter break last semester, President Obama signed a new law into effect that ended a cliff-hanger of a year.  No one could be certain whether the government would act to amend the federal estate tax law (that had been repealed for 2010).  To read more about the old state of affairs, check out this older post .

If no legislation had been passed, the federal estate tax would have come roaring back to tax estates worth more than 1 million dollars at a maximum rate of 55%.

Congress did act!

In a nutshell, The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 was absurdly generous to rich people.

This new law now provides each person with a $5 million exemption from federal gift (new law) and estate taxes. The maximum tax rate was set at 35% and what’s even more generous is that spouses can use each other’s unused exemption!

This is a new concept called “portability”.  How it works:  Let us say a husband dies and he leaves his entire estate to his wife so he doesn’t use any of his $5 million exemption (his estate uses the marital deduction so it pays no estate taxes).  When the wife dies, her estate can use her deceased spouse’s exemption plus her own (and thus she can pass 10 million tax-free).  Of course, rich people think this portability is great.  They are already making jokes about wealthy widows seeking to marry terminally ill poor men to get their unused exemptions!

The good news is that this law isn’t forever, yet.  Portability lapses in 2013, when the exemption drops to 1 million and the rate goes up to 55%.  Do you think this will ever happen?  Here’s what I think:

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