That may sound like good news, but if Congress doesn't act by 2011, estate taxes will come back with a vengeance. In 2011 and beyond, the estate tax goes back to where it was before the Bush tax cuts -- a tax rate of 55% on any estate of $1 million or more. When the Bush bill was passed, dark humor abounded about how families wouldn't report deaths until 2010, or about how others would encourage sick family members to die in that yer.
Now the day of reckoning has come, and Congress is trying to act. The House passed a bill to prevent this estate-tax fiasco from happening. On what was primarily a party-line vote, the House voted to exempt the first $3.5 million of an estate (first $7 million for married couples). Anything above that would be taxed at a rate of 45%, continuing the same rate as in 2009.
Senators are pushing for a 35% estate tax rate, with the first $5 million exempted. This version has bipartisan support, but might not have enough backing to reach the 60-vote hurdle that will likely be needed. Plus, the Senate floor is tied up with health care legislation and other bills that take priority over the estate tax.
Small Family Farmers at Risk?
Estate taxes don't make up a large share of tax receipts, with about $20 billion collected each year. In 2009, only about 5,500 estates were subject to the tax.
Opponents of extending the estate tax say it hurts small business and family farms. In fact, the American Farm Bureau says farms large enough to support a family can easily pass the exemption threshold and be forced to sell some land. But how many farmers do you know with estates of more than $3.5 million who are considered small family farmers?
Anyone with $3.5 million or more in assets should be contacting an attorney for estate planning. For example, families with a farm or a small business can help themselves by getting key-person life insurance, or some other form of life insurance. The insurance proceeds can be used to pay the taxes. That way, the business continues with no tax problems, and no assets must be sold to pay the tax. That's a very common tactic that estate planners use.
While most multimillionaires and multibillionaires want the estate tax repealed, Warren Buffett frequently speaks out in favor of it. One of his most famous quotes on the subject: "Dynastic wealth, the enemy of a meritocracy, is on the rise. Equality of opportunity has been on the decline. A progressive and meaningful estate tax is needed to curb the movement of a democracy toward plutocracy."
The estate tax levels the playing field to a certain degree, and without one what Buffett fears would most likely come to pass.
Lita Epstein has written more than 25 books including The 250 Estate Planning Questions Everyone Should Ask.