Currently, the estate tax is due to terminate (i.e. zero estate taxes) for the calendar year 2010, and return in full force under pre-2001 rules for 2011. Congress is debating the issue of extending the estate tax through next year. Currently up for consideration is H.R. 4154 (just passed the House) which proposes to extend the 2009 rules permanently. Up for debate, however, is changing some of the key figures (e.g. maximum tax rate, estate tax exemption). Some senators want the maximum rate to be reduced to 35%, and the exemption increased to $5 million. Additionally, some senators want the exemption amount indexed for inflation. These differences may result in some extended debate over the House bill. If Congress does not get around to passing legislation before year end, gift and estate taxes will be a challenging issue to wrestle with next year particularly if retroactivity is considered. If they do not act before 2011, the old more onerous rules will apply.
| The maximum estate tax rates have been as follows | |
| In the Calendar Year: | The Maximum Rate Is: |
| 2003 | 49% |
| 2004 | 48% |
| 2005 | 47% |
| 2006 | 46% |
| 2007, 2008, and 2009 | 45% |
If no new legislation is passed, the estate tax will revert in 2011 to a maximum rate of 55%.
As it currently stands, the traditional strategies for reducing estate and gifts taxes are still viable through the end of this year. The current maximum estate tax rate is 45%. The maximum amount that can pass free of estate taxes for U.S. citizens and residents is $3.5 million. For nonresidents of the U.S., that maximum is only $60,000. The estate tax applies to nonresidents, however, only to the extent the assets are what the law defines to be "U.S. assets", like U.S. real property and stock in U.S. corporations. The maximum amount that can be gifted tax free is $1 million in addition to the current annual exclusion of $13,000. Nonresidents are limited to only the annual exclusion amount for tax-free gifts. Again, however, the gift tax only applies to nonresidents to the extent of U.S. assets. Since the rules defining U.S. assets vary between the estate tax and gift tax (e.g. stock in a U.S. corporation is not a U.S. asset for gift tax purposes), some planning opportunities are available.
Estate and gift taxes can be a burden if proper planning is not implemented. Through the end of this year, various techniques can be employed to guard against any undesirable surprises.
If you wish to discuss planning options for you, please contact Peter Trieu.
©2009 Rowbotham & Company LLP. All rights reserved.
