As a result of the Congressional compromise known as the 2001 Tax Relief Act, the applicable exclusion amount (the amount exempt from federal estate tax) has been increasing and the maximum tax rate has been decreasing. The current exemption amount is $2,000,000 and will rise to $3,500,000 with dates of death on or after January 1, 2009. The $3,500,000 exemption amount is only for 2009, and in 2010 the tax is scheduled to be repealed (but only for that year). If nothing happens legislatively before the end of 2010, the Act has a Sunset Provision and we will revert back to the $1,000,000 exemption amount. No doubt the proponents of estate tax repeal felt that the repeal in 2010 should and could be made permanent. Opponents, and perhaps realists, believed that estate tax would not be repealed and that Congress would enact a more permanent exemption amount before 2010.
While the Tax Relief Act was still young, there was optimism that the estate tax would be repealed or the exemption amount raised to tax only the very wealthy, e.g., $10,000,000 and up. There is no longer serious talk of repealing the federal estate tax. The question is now when will Congress act and what will the exemption amount likely be.
When will Congress act? Congress will almost certainly be forced to address the repeal issue before the one year repeal scheduled for 2010. Based upon the lack of urgency, Congress has not addressed this issue to date, and may not until late in 2009. It has also been suggested by some people following this legislation, including Professor Jeffrey N. Pennell, that Congress could wait until 2010 with a retroactive effective date to the beginning of that year.
What will the exemption amount likely be? No one knows…yet. As stated above, no one is realistically talking repeal and the speculation is that it will be more in the $3,000,000 to $5,000,000 range. The Kiplinger Letter now forecasts that Congress will freeze the exemption amount at $3,500,000. [The Kiplinger Letter, Vol. 85, No. 45].
Another important aspect of the estate tax law is the maximum tax rate. The maximum tax rate for the federal estate tax is 45%. Much like with the exemption amount, there was optimism early on that the rate would drop significantly. The optimism is now waning, and The Kiplinger Letter now predicts that Congress will freeze the maximum tax rate at 45%.