The State of Federal Estate Taxes

The next couple of years should be very interesting with respect to federal estate tax laws. Revisions to the federal estate tax law in 2004 increased the exemption amount (the maximum amount a decedent may leave without incurring any estate tax) on an incremental basis which culminates in a complete elimination of any federal estate tax for people who die in the year 2010. This means that regardless of the size of your estate, if you die in 2010 you will pay NO federal estate tax. The tricky thing is, however, than in 2011, the estate tax returns, and the exemption amount, currently at $3.5 million in 2009, will revert back to $1 million. For the last five years, estate planners have wondered what, if anything, congress will do about the quirks of this law. Given the state of the economy and the other issues facing congress, it may well be that nothing is done in the near term.

The law as it stands has a funny potential impact. When it was enacted in 2004, some nicknamed it the “Throw Mama From The Train” law, joking that children of wealthy older people would be motivated to “eliminate” their parents in 2010 in order to receive the maximum inheritance without tax. Conversely, according to an article in The Boston Globe on March 1, 2009, Jeffrey Frankel, who served on the Council of Economic Advisors under President Clinton , has pointed out that potential heirs of ailing wealthy parents may take whatever measures are necessary to keep their parents alive beyond December 31, 2009 in order to reap the benefits of the tax law repeal. He posits that intensive care units in hospitals will see a big spike in business as these children strive to keep their parents alive and breathing until 2010 arrives.

One has to wonder whether congress contemplated these odd, non-legal quirks of the 2004 revisions at the time they were enacted. It will be interesting to see if they take the time to straighten things out before the end of this year.