Estate Tax: The exemptible limit goes up, down and disappears

Post by YiLin Zhu
By Mike Wells on Feb. 1 2009

The status of the federal estate tax, called by some the "death tax," has been a hot topic for many years. No seminar for estate-planning lawyers would be complete without some comment on what my father used to call the "Big Question." What's coming next?

Over the past several years, the size of estates that are exempt from any net federal estate taxation has grown considerably. It was not too many years ago that the size of one's net taxable estate (not going to one's spouse or to a qualified charity, generally to be deducted) subject to federal estate tax was $60,000 and above. It did not take a lot of assets to get to that number. Over the years, various exceptions have been made, such as for family businesses that otherwise would have to be sold to pay the estate taxes on that business when the owner died.

As of Jan. 1, the size of an estate that is exempt from any net federal estate taxes (after appropriate deductions) is $3.5 million. This is an increase from the previous exemptible limit, which was $2 million through 2008. Unless the law is changed, there will be no federal estate taxes due on any estate if one dies in 2010. The richest person subject to federal estate taxes could die without any federal estate being owed, no matter who received the money.

But that net exemptible limit will revert to $1 million in 2011, which was the limit in 2001.
In 2001, Congress and the administration wanted to be able to declare they had "done away with" federal estate taxes. And that they did, for one year -- 2010. But both the Congress and the administration knew that it was not practical to have a tax code that had an exemption limit that changed every couple of years or so. And, they knew it was not going to be acceptable to reduce the net exemptible limit in 2011 to the same limit it was in 2001.

The idea was that a future Congress would reform the federal estate tax code and set one net exemptible limit. Before the effect of the 2008 wealth reduction from the precipitous drop in the Dow Jones Industrial average and its companion indices, only 2 percent of all Americans had a net estate worth of more than $2 million. Only 1 percent had a net estate worth more than $3 million. Therefore, a net exemption of $3 million or more would exempt from federal estate tax virtually all Americans, save for the wealthiest among us.

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