I recently read an interesting exchange from a group of estate planning attorneys in regards to where the estate tax exemption will be headed in our changing economic times.
Estate Taxes are computed by taking one's net estate value, subtracting the estate tax exemption, and multiplying the result, called the taxable estate, by the 45% estate tax rate.
Take for example, the married couple with a $5,000,000 estate. If both spouses were to die, assuming the estate plan was done properly, you would take the sum of $5,000,000, subtract by $4,000,000 ($2,000,000 per spouse), to get a taxable estate of $1,000,000 (taxable estate). Take this result and multiply by 45% (the estate tax rate). The resulting estate tax is $450,000.
The Estate Tax Exemption is scheduled to change to $3,500,000 per person in 2009. There will be no estate tax in 2010. However, in 2011, the estate tax exemption is scheduled to go back to $1,000,000 per person, adjusted for inflation from 2001.
If that's not confusing enough, factor in the congressional battle over the past few years to set a permanent estate tax. As recently as 6 months ago, it was my feeling that the estate tax exemption would likely be set at $3,500,000 per person, adjusted for inflation as time goes on.
However, a recent list-serve conversation between some estate planning attorneys indicated that currently it appears Congress is leaning toward letting the estate tax exemption go back to $1,000,000 in 2011.
This means that more of my clients will be subject to the estate tax if the exemption does indeed go back to $1,000,000 per person. I have done projections for clients based on a $2,000,000 estate tax exemption, but it appears that for the time being, we need to assume that in 2011 the estate tax exemption will go back to $1,000,000. As such, it is imperative that anyone with an estate above $2,000,000 take affirmative steps to protect their estate and reduce their estate tax burden.
