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Federal Estate Tax: Uncertain Times

By Michael A. Kraft

Earlier this year, George Steinbrenner, the former owner of the New York Yankees, passed away with an estate estimated to be valued at $1.1 billion.  If Steinbrenner had passed away in 2009, his estate would have been liable for federal estate taxes of almost $500 million.  If he had died in 2011 and beyond, under current law, his estate could have faced federal taxes well in excess of $500 million.  However, since Steinbrenner passed away in 2010, a year in which the federal estate tax has been repealed, the federal estate tax bill for his estate was zero.

This highlights the dramatic variance, and some people say absurdity, in the potential federal estate liability for the estate of individuals who pass away in 2009, 2010, 2011 or thereafter, under current law.  While few individuals have estates anywhere near the size of Steinbrenner, it is not unusual for individuals or couples to have investments, real estate, life insurance policy death benefits and other assets totaling in excess of $1 million or more.  For these individuals, the current state of federal estate tax law creates great uncertainty in their estate planning.

In 2007 and 2008, each individual at death could transfer up to $2 million without any federal estate tax liability since the estate tax exclusion per individual was, then, $2 million.  In 2009, the federal estate tax exclusion rose to $3.5 million.  However, due to the tax laws signed by President George Bush expiring as of January 1, 2011, the federal estate tax exclusion and federal estate tax rates are scheduled to revert back to those in place before the tax bill was signed into law. Therefore, as of January 1, 2011, the federal estate tax exclusion will revert back $1 million per individual. Further, the top marginal federal estate tax rate will rise to 55% (up from 45% in 2009).  These changes in the law, specifically the decrease in the federal estate tax exclusion to $1 million, will undoubtedly cast the federal estate tax net over a much larger number of decedents in 2011 and beyond than any other time in recent history.

For this reason, it is no surprise that numerous bills have been introduced in Congress in the past years to address this, including the tax bill introduced into Congress in the last few weeks pursuant to the much publicized compromise between President Barack Obama and Republican leaders.  As of press time, though, further political wrangling in Congress has made the future adoption of this tax bill uncertain. 

If no new estate tax bill is adopted in the near future, the federal estate tax laws set to be reinstated in 2011 will undoubtedly affect a significant portion of the United States citizenry upon their deaths.  While commentators generally believe that Congress will pass new estate tax laws soon, these same commentators previously believed that Congress would never allow the estate tax to remain repealed in 2010 pursuant to the Bush tax bill, stating that Congress would instead adopt a federal estate tax in 2010.  This obviously never happened, to the joy and benefit of George Steinbrenner’s family.  Until Congress does agree on a new estate tax law, there will be continuing uncertainty for estate planning attorneys and their clients.

Originally published in the Winter 2010 edition of Quinn Quarterly.