The federal estate tax is on a one-year hiatus as of June 2010, but the future of when the so-called death tax might return remains up in the air. In the meantime, families of deceased parties and their frustrated accountants are left in a financial and legal limbo, unsure of how to proceed in settling an estate given the unsettled state of affairs.
 
The break in the federal estate tax may continue for the rest of 2010, but most tax experts believe legislators will reinstate the tax at some point later in the year. It also is widely expected that the law will be made to apply retroactively for all of 2010, meaning estate income received during the year when the law is not in effect would still be taxed.

How Did We Get Here?

U.S. lawmakers included a one-year reprieve on the federal estate tax in the Economic Growth and Tax Relief Reconciliation Act of 2001. Individual state estate tax laws were not affected and continue to be assessed in 2010 and for the foreseeable future, regardless of what happens with the federal estate tax.

As of June 2010, the federal estate tax rate is set at 0% and if nothing changes in the law, it will remain that way for the rest of 2010. The tax is scheduled to return at a top rate of 55% on January 1, 2011. In 2009, before the tax was put on hold, the taxable rate stood at 45%, so after it is reinstated (either later in 2010 or in January 2011), the federal estate tax will be 10% higher than it had been.

If the current estate tax law does not change, property transferred from decedents during 2010 would be treated as if it was transferred by gift. That means no federal taxes will be withheld, since gifts do not fall under the estate tax.

What’s Next?

The forecast for the future of the federal estate tax is cloudy at best. There has been little solid direction from Washington, D.C. on what is going to happen down the road. Federal lawmakers have not formally addressed what they are going to do in the long term about the national estate tax. So it remains on hold.

Estate planning is a notoriously complicated area of the law, where the laws and guidelines are often updated with substantive changes. Keeping up to speed on the current tax rates and other technical issues associated with applying the federal estate tax can be taxing in and of itself.

The kink in the federal estate tax during 2010 is yet another wrinkle to estate planning that must be ironed out. Parties affected by the change should be sure that their estate planning legal counsel is up to speed on the current state of the tax to avoid costly mistakes and omissions in the handling of the estate. 

If you or your loved ones need legal advice on how to proceed with calculating federal estate taxes given the current status, a knowledgeable estate tax attorney can explain more about what the one-year break in the federal estate tax will mean for you, your family, and your estate.