Federal Estate Tax "Death Tax" Is Back to Life for 2011 and Beyond

Written by Curtis G. Swarts, CPA

The Economic Growth and Tax Relief Reconciliation Act of 2001 gradually lowered the maximum tax rate imposed on estates while substantially raising the applicable exclusion amount for tax years 2002 to 2009. Over these years the maximum estate tax rate fell from 60% (55% marginal rate plus 5% surtax on estates from $10 million to $17 million) to 45% for tax years 2007 to 2009.

For historical perspective, the federal estate tax was originally enacted in 1916, when it was imposed as a 10% tax on estates in excess of 50,000. The tax rates and exemption amounts have varied since that time, reaching as high as 77% on estates in excess of $60,000 for decedents in 1941 to 1976.

For 2010 the Economic Growth and Tax Relief Reconciliation Act of 2001 repealed the estate tax completely for decedents dying in 2010. This resulted in several well noted instances of multi-million and even a few multi-billion dollar estates passing to heirs completely free of the federal estate tax.

This one year hiatus comes to an end with the recently enacted Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. Under this act the federal estate tax “Death Tax” comes back to life for 2011 and 2012. The exemption amount will start at $5 million per individual in 2011 and be indexed for inflation thereafter. The maximum estate tax rate for these years will be 35%.

A further provision of this act allows the heirs of decedents dying in 2010 a choice of electing to apply 2010’s rules vs. the rules for 2011. This provides a planning opportunity for taxpayers and their tax professional related to the calculation of capital gains taxes on assets inherited in 2010. Taxpayers finding themselves in this circumstance should immediately consult their tax advisor.