What's Going On With Federal Estate Taxes?

The status of the federal estate tax is in serious flux. The problem dates back to 2001, when Congress passed an estate-tax law that increased the size of estates subject to tax on a sliding scale over a period of 10 years. Until December 31, 2009, the federal exemption is $3.5 million, but on January 1 the estate tax disappears entirely only for 2010. In 2011 it is reinstated with an exemption of $1 million. Changes to the Generation Skipping Tax rules and Gift Tax rules are also imminent. When this law was first passed, it was jokingly referred to by some as the “throw momma from the train” law, on the theory that children of the very wealthy would start knocking off their parents in 2010 in order to inherit all the wealth without any tax liability.

Nobody would have thought we would get to the end of December 2009 without some further revisions to the laws, but here we are. The uncertainty of these laws and the failure of Congress to provide firm direction has thrown estate planners into a tailspin.

The House of Representatives voted this month to make the current law permanent, but the Senate rejected the extension as voted by the House. With just days to go, an extension of the current law before things change seems in doubt.

So what happens if the law is not extended at the $3.5 million level? Conventional wisdom says a law will be enacted that will be retroactive to January 1, 2010, but some legal scholars argue that a retroactive law would be unconstitutional and are certain that it will face legal challenges.

Interesting times, folks. Stay tuned.