As you may already know, Congress is currently debating whether or not to keep the “Bush Tax Cuts” before they expire on December 31st. There has been a lot of debate on television and talk radio on whether or not to raise income taxes on the middle class and the wealthy.
What is not as publicized is what will happen to the federal estate tax. Unless Congress acts soon the federal estate tax is scheduled to come racing back on January 1st at much more aggressive levels. Many more Americans will have significant estate tax liability than ever before.
Here is why. The federal estate tax is not an income tax. It is a transfer tax that is paid on your death when your assets transfer to your heirs. As a general rule, all of your assets, including life insurance, are counted as assets passing to your heirs. The 2001 tax act, signed to law by President George W. Bush, gradually reduced the maximum rate of the federal estate tax from 55% to 45%. It also gradually increased the amount of assets that you could pass federal estate tax free to $3.5 million in 2009.
However, now, if Congress fails to act and the Bush Tax Cuts expire on at the end of 2010, the law will revert back to allowing only $1 million to pass federal estate tax free to your heirs and increase the maximum tax rate to 55%. This is an extremely high tax rate and there are many Americans who have a net worth of over $1 million, especially when you include their retirement plans, real estate and life insurance proceeds to their other assets.
No one knows if Congress will act before the end of the year. But this uncertainty in the law means your estate plan may need to be changed. This is the time that demands a new approach to estate planning with greater flexibility to make sure it can adapt to whatever Congress throws at us in 2011 or beyond.