2010 Estate Tax Anomaly

In June 2001, I wrote an article for the Houston Chronicle in which I detailed the new tax law changes that had been put into effect that would completely eliminate the estate tax in 2010. At the time, I posed the question, “Is the repeal of the estate tax a myth or a miracle?” As we sit here in April 2010, I’m not sure that anyone knows the answer any better today than we did 9 years ago.

Under the 2001 legislation, the estate tax exemption (the amount a person would leave to their family free of estate tax upon their death) was set to increase from $1 million in 2001 to $3.5 million in 2009. Additionally, the tax would be completely abated in 2010 (so that no one dying in 2010 would pay taxes as a result of their deaths), and then in 2011, the estate tax exemption would return to the $1 million level that had existed in 2001.

As the recession hit the U.S. in full force in 2009, members of Congress and the President have continually discussed the option of re-instituting the estate tax for 2010 and making it retroactively effective to estates of anyone who died in 2010, even if they died prior to the enactment of the new law. The March 28, 2010, death of Houston Billionaire Dan Duncan has created intense buzz about these issues because the death of someone like Duncan in the one tax-free year in decades means that the U.S. Treasury will miss out on potentially billions of dollars of tax revenue which it might have ordinarily received as a result of Duncan’s death.

Although very few estates are as large as Duncan’s, the 2010 quandary has the potential to affect a vast number of people dying in 2010. If Congress re-institutes the tax for this year, then it will necessarily include a cap on the amount of money that someone could leave to their family members tax free. At Ford & Mathiason, we had 2 clients die in just the first two weeks of January, 2010, who will potentially be affected by these changes. In our first meeting with their families after their deaths, we had no option but to tell them to just “hang on and see what Congress does by the end of the year.” Until Congress makes a decision about the estate tax issues, we will not know how to advise our clients.

Regardless of how the estate tax issues play out this year, 2010 will go down in the history books as an interesting year from an estate tax perspective. It is the first year in decades in which there could be no estate tax, but by the end of the year, that may be changed completely and will cost some taxpayers considerable amounts of money.

Stay tuned to see what happens!