The New Congress and Future of the Federal Estate Tax

by Timothy Stallings

The uncertainty and complexity of the federal and state estate taxes have many people scratching their heads in 2011. The only constant regarding estate taxes is the fact that they change on an almost annual basis. For this reason, it is vital to be proacative and begin your estate planning process to ensure your estate can weather the fluctuating peaks and valleys of the infamous federal estate tax.

On December 6, 2010, President Obama announced that he reached a tentative deal with Republicans to reform federal taxes, including the federal estate tax. Until the deal is signed into law, the estate tax is set to return in 2011 with a $1 million exemption and a 55% rate. As of December 17, 2010, it appears that the deal will come to fruition — so what do these proposed tax changes mean for your estate planning?First things first, you need to understand that an estate tax is a tax levied on inherited wealth after someone dies. It is made up of two parts: the exemption, or “floor”, and the tax rate. At the beginning of the Bush Administration, the exemption amount was $675,000 and the tax rate was 55%. During George W. Bush’s Presidency, the estate tax rate was reduced slowly.If the proposed plan is passed and signed into law by President Obama, the exemption will be increased to $5 million and the rate will be 35% for the next two years. Below are the exemption amounts and estate tax rates from previous years and the upcoming estate tax projections for 2010 and 2011 (assuming the law proposed by President Obama outlined above is signed into law).

  • 1997 ($600,000), 55%
  • 1998 ($625,000), 55%
  • 1999 ($650,000), 55%
  • 2000 ($675,000), 55%
  • 2001 ($675,000), 55%
  • 2002 ($1,000,000), 50%
  • 2003 ($1,000,000), 49%
  • 2004 ($1,500,000), 48%
  • 2005 ($1,500,000), 47%
  • 2006 ($2,000,000), 46%
  • 2007 ($2,000,000), 45%
  • 2008 ($2,000,000), 45%
  • 2009 ($3,500,000), 45%
  • 2010 (Unlimited), N/A
  • 2011 ($5,000,000), 35%
  • 2012 ($5,000,000), 35%


Somewhat surprisingly, the proposed tax rate is actually lower than it was during the Bush Presidency. Of course, by preserving the “estate tax”, the door remains open for the estate tax to be raised and the exemption to be lowered in the future, bringing a larger number of estates subject to the estate tax. Anyone familiar with American government knows that it is much easier to increase an existing tax than creating a new one, especially in times of economic hardship and budget shortfalls. What we do know is that the estate tax rate will certainly change again and if history holds true, it will most likely be raised during our lifetime. Despite President Obama’s decision to push this tax legislation through, be certain that similar tax reductions are unlikely to be the norm. President Obama acknowledged this by stating that while the estate tax changes are “generous treatment” for the wealthy, he finds consolation in the fact that they are only “temporary”.

Despite the fact that the estate tax exemption is rising and the tax rate has decreased, there is another sign that estate taxing will be around for awhile. Currently, fifteen states and the District of Columbia levy a state inheritance tax. Multiple states, including Hawaii and Delaware, recently brought back the state inheritance tax to help reduce budget deficits. The exemptions on the state level are much lower than those on federal level. What this means for you is that even if your estate will not face the federal estate tax, your estate is likely to be subject to a state inheritance tax. For instance, the exemption for state estate tax in Ohio is only $338,333, which means that any portion of your estate exceeding this amount will be subject to an estate tax.

If we have learned anything from the history of the estate tax, we know that the federal estate tax rate and the amount of the exemption will certainly fluctuate in the future. As you plan for your future, keep in mind that the only federal estate tax rate that matters is the rate in effect at the time of death. Even if you think that your estate will not be affected by the federal estate tax at this moment, it certainly could come into play in years to come. For that reason, developing an effective estate plan to help eliminate or significantly reduce your exposure to these federal and state estate taxes is important, regardless of the estate tax rate and exemption which are currently in place.

AlerStallings LLC is a uniquely situated firm with offices in Dublin, Ohio (Columbus area), Atlanta, Georgia and Chicago, Illinois. If you or a company you own could benefit from advanced tax planning, please contact AlerStallings at (614) 798-9800. Remember that proper planning TODAY, ensures protection and peace of mind for TOMORROW.


About the Author


Timothy H. Stallings

Tim is one of the founding members of AlerStallings LLC and specializes in wealth transfer and protection for small business owners, including the use of captive insurance.