Changes To The Estate Tax Rates And Exemptions For 2011-2012

Among the changes that took place due to the recent Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 was the reinstatement of an estate tax.   Due to gridlock in Congress last year, the estate tax was allowed to lapse.  That means anyone who had a wealthy family member die in 2010 could possibly see millions in tax savings.  For example, the family of George Steinbrenner will pay no estate taxes since he died in 2010.

Estate Tax Reinstated 2011

The tax bill that Congress just passed and President Obama signed in December reinstated the estate tax for the 2011 and 2012 tax years.   So what will the estate tax look like for the next two years?  Will it return to 2009 levels, or return to levels seen before the 2001 Bush tax cuts?

• Pre-2001 Bush Tax Cuts: $1 million exemption, and a 55% rate on estates worth $1 million to $10 million. Rate rises to 60% on estates worth more than $10 million.
• 2001-2009: $3.5 million exemption and a 45% tax rate on amounts over $3.5 million.
• 2010: No estate tax
• New Estate Tax For 2011-2012:  $5 million exemption for an individual or $10 million for a couple, with a rate of 35% for estates above these levels

So basically what happened was that the estate tax was re-implemented with a higher exemption, and at a rate lower than it had been from 2001-2009, and much lower than it had been before that.  So the estate tax is back for 2 years at least, at which time we'll need to revisit it again, or it will return to pre-2001 and Bush tax cut levels (55-60% rate)

From Don't Mess With Taxes:

For 2011 and 2012, estates worth $5 million or less won't be taxed at all. For estate values greater than that, a 35 percent tax rate will apply.

That's better than the 2009 law, which imposed a $3.5 million exemption and a 45 percent tax rate on the excess. And it's much better than what would have happened had the Bush tax cuts expired. If that had happened, estates worth more than $1 million would have faced a 55 tax rate. The bad news, though, is that Congress has set up a repeat of 2010. Unless it acts again in two years, the $1 million/55 percent rate law will be back.

How Many People Will Be Affected By 2011-2012 Estate Tax?

So now that the estate tax has been reinstated with a higher exemption, and at a rate lower than it used to be, how many people will be affected and still have to pay the estate tax?

The head of the American Bar Association's section that focuses on estate law estimates that less than one-half of 1 percent of people who die in 2011 will be hit by the estate tax. That's minuscule compared to the 10.5 percent of estates that paid Uncle Sam in 1977.

So while wealthy folks who died last year may have gotten away with paying no estate taxes, the families of those less than 1/2 of 1 percent who pass on this year can take solace that at least the estate tax is returning at a lower level than it was at previously.  They won't be subject to the 55-60% rates that were around pre-2001.

One other thing to note, while folks who died last year may not have had an estate tax, they also didn't have the benefit of a stepped up basis for capital gains taxes.  For a discussion of that, see this post that discusses the estate tax stepped up basis.

Also, in case it is any consolation, at least the tax rates in the US are at least somewhat lower than other countries: Tax Rates by Country

What do you think of the estate tax?  Do you think it is necessary and fair, or do you think that it is essentially taxing income twice?  What are your thoughts on the returning estate tax?