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Home Blogs Derek's Tax Blog Estate Tax Deal for Two Years: 35% Tax Rate And $5 Million Exemption
Written by Derek W. Jensen
Monday, 06 December 2010 11:45

President Obama and Republicans have apparently come to terms on extending the Bush era tax cuts and believe it or not that deal includes the estate tax. The Federal Estate Tax would still return next year, but instead of coming back with a top rate of 55% and an exemption of $1 million, it would return with a top rate of 35% and an exemption of $5 million - for the next two years. See:  Obama Announces Estate Tax Deal With Republicans: 35% Tax Rate And $5 Million Exemption, For Two Years - Hani Sarji - Estate of Confusion – Forbes

This is similar to the Kyl-Lincoln bill that passed the Senate in early 2009. However, this is not early 2009 and it is not clear that the same bill would still get the needed 60 votes. In fact, Senator Sanders has already threatened to filibuster the deal and send it into the next congress. For its part, the House has not passed an estate tax exemption this high. It will be interesting to see if lame duck session of the House will be willing to pass it now. We will wait and see, but there is some indication that it is not popular among many in the President’s party.

From a planning perspective, the bigger issue is what should we advise our clients? My approach stays the same, plan with the law as it is, not what the politicians promise it will be. Is this any more of a sure thing then in 2009 when President Obama promised an estate tax fix and his party controlled both the House and Senate?

While I am optimistic that a plan can be reached, I remain skeptical. After all, President Obama is only being pragmatic. He has bigger issues that he wants to get through and he will begrudgingly go along to get those dealt with.

Another troubling aspect of this deal is that it is not a permanent solution. Under the deal the 55% tax rate and $1 million exemption would return in 2013. Married taxpayers will still need to utilize highly flexible planning that will allow the surviving spouse to adjust the planning after the first spouse’s death. This can be done by utilizing a “wait-and-see” trust that can adjust for different Federal and State exemptions and can be adjusted for up to 15 months after the date of the first spouse’s death if congress changes the law.   



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