The Estate Tax Law is Set to Change, Too

In addition to other “Bush-era” tax cuts that will expire at the end of the year if Congress doesn’t act, and all of the discussion of “sequestration,” there is another change on the horizon that is getting less press, but could affect millions of families.

Currently, the law exempts estates valued at less than $5.12M from federal estate tax, and the tax rate for estates worth more than that is 35%. If Congress does nothing to address this, the exemption will revert to estates worth less than $1M, and the estate tax rate will increase to 55%. Many people who do not think of themselves as wealthy, but who have accumulated a modest amount of savings, and own their homes free and clear could easily have an estate worth a million dollars.

Possibly the most significant provision set to expire is the “portability” of the unused spousal exemption. Right now, if the first spouse to die had an estate worth $3M, the unused portion of his exemption would be transferred to her spouse, so that the surviving spouse’s total exemption would be his exemption of $5.12M + her unused share of $2.12M. However, if the current estate tax law expires, this provision (which is even more important with a lower exemption rate) would expire as well.

Republicans argue that the exemption should either remain at the current level, or the estate tax should be eliminated altogether. Democrats argue that, in order to cut the deficit, the exemption should return to $3.5M (which was the level in 2009), with a tax rate of 45% for estates worth more than that. This is a debate that we should all watch closely.

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