Elizabeth Spilotro, Esq.
Within President Obama's somewhat surprising tax cut compromise reached with Republican leadership late Monday is an especially surprising proposal regarding the estate tax: a reintroduction of the temporarily-dormant tax with a $5MM per person exemption and a 35% tax rate on estates exceeding that amount.
Under EGTRRA, the Bush-era economic stimulus bill that ushered in our current, controversial reduced income tax structure, the estate tax was also “reformed”, with an exemption that progressively increased to $3.5MM in 2009 (with a 45% tax rate on amounts exceeding this threshold) until temporary full repeal of the estate tax in 2010. In 2011, the estate tax regime is scheduled to return to pre-2001 structure, with a $1MM exemption and a 47% marginal tax rate absent legislative intervention.
Conventional wisdom has held that the revisited estate tax would most likely resume the 2009 structure ($3.5MM exemption; 45% marginal rate), so President Obama's compromise is a generous surprise clearly designed to placate Republican leadership. The compromise is likely to spark division among Democrats, many of whom support an expanded estate tax while others bitterly oppose it on policy grounds.
In his comments regarding the compromise, President Obama indicated that, like other aspects of the deal, the expanded estate tax package will be in place for a temporary two-year period. It's not clear whether that period will begin 1/1/11, or be imposed retroactive to 1/1/10 as has been speculated. Quite possibly executors of 2010 estates will be given the choice to apply either the 2010 or 2011 tax law; because the 2010 “repealed” tax code imposes an unwieldy carryover-tax-basis rule to assets being transferred at death, for many estates the 2011 estate tax provisions may in fact be more tax-advantageous in the long run.