Federal Estate Tax Law

Uncertainty in Federal Estate Tax Law

Attorney Keith J. Pilger (March 2010)

Back in 2001 Congress passed the Economic Growth and Tax Relief Reconciliation Act (sometimes referred to as “EGTRRA”). EGTRRA contained several tax law changes including changes to the federal estate, gift, and generation-skipping transfer (GST) taxes.

Under EGTRRA the federal estate tax exemption was gradually increased from $1,000,000 in 2001 to $3,500,000 in 2009 and then ultimately repealed in 2010 to be replaced with new basis adjustment rules. However, the repeal of the estate tax was never designed to be permanent. Rather, EGTRRA contained a sunset provision at the end of 2010, which results in the federal estate tax law reverting back to its 2001 form on January 1, 2011. This would mean a return to a $1,000,000 exemption and a 55% maximum tax rate. The effect of these changes is illustrated below.

	2009	2010	2011
Gift Tax Exemption	$1,000,000	$1,000,000	$1,000,000
Maximum Gift Tax Rate	45%	35%	55%
Estate Tax Exemption	$3,500,000	Unlimited	$1,000,000
Maximum Estate Tax Rate	45%	None	55%
Exemption from GST Tax	$3,500,000	Unlimited	$1,000,000 indexed for inflation since 1999
GST Tax Rate	45%	None	55%

It was widely believed that we would never get to this point and Congress would pass an extension of the estate tax to avoid a complete repeal in 2010. However, Congress was unable to agree on an extension prior to December 31, 2009. Most experts believe that Congress will pass an extension of the estate tax this year and make it retroactive to January 1, 2011. However, given the events of last year and the current political climate in Washington, a return to a $1,000,000 estate tax exemption in 2011 is not out of the question.

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Uncertainty in Federal Estate Tax Law