We have now moved onward into the new year with the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 fully in effect. The fact is that you could hear a collective sigh of relief throughout much of the estate planning community when the measure was passed on December 16th and signed into law by the president on the 17th.
As has been widely reported, rather than the $1 million estate tax exclusion that had been on tap the exclusion was raised to $5 million as a result of this legislation. And instead of the 55% maximum rate that had been scheduled the rate of the tax is 35% this year and through 2012, and we can rest assured that another round of wrangling will take place as the 2012 election season plays itself out.
Now that it has all sunk in, should we really be overjoyed by these estate tax changes? Sure, they are an improvement over the parameters that existed previously but the same problems exist. Most poignantly, the estate tax is levied on assets that have been accumulated or acquired after taxes have been paid on them.
For example, if your home is part of your estate, you paid your mortgage each month with earnings that were remaining after you paid income and property taxes. So why should you have to pay a tax, be it 35%, 55%, or even 1%, on the value of the home that exceeds the exclusion when it is being passed on to your heirs after your death?
Speaking of the exclusion, why should a few have to pay the tax when the vast majority of Americans do not? Why does an estate worth $5 million pass free of taxation while an inheritance of $7 million is billed $700,000 by the IRS? Why should someone with a $20 million estate have to pay the government $5.25 million when four estates worth $5 million owe nothing?
Yes, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 gave Americans a little more breathing room while providing for a stifling 35% tax rather than a breathtaking 55% federal death levy. But let’s keep things in perspective.