Will Congress Allow Current Estate Tax Rates to Expire?

Congress is expected to debate the pros and cons of allowing current estate tax rules and rates to expire in 2013, reverting back to 2001 levels, or permanently changing estate tax law so 2009 rules and rates apply. Either plan would increase the estate tax rate and lower the dollar amount of the estate tax exclusion level.

What is an Estate Tax?

An estate tax is a tax on a deceased loved one's right to transfer his or her property after he or she has died. First, the Internal Revenue Service (IRS) calculates a gross estate value of all assets at the time of someone's death, including cash, real estate, trusts, annuities and business interests.

Then, the IRS applies deductions for debts, estate administration expenses and property passed to spouses or charities to the gross estate value to come up with a value for the deceased's taxable estate.

Families must file an estate tax return when this taxable estate, plus prior taxable gifts, exceed a certain value. This value is known as the tax exclusion level. This number, as well as the estate tax rate, is what Congress will debate.

Congress Debates the Estate Tax

In 2013, current estate tax rates will expire and revert to 2001 levels unless Congress takes action. Currently, the estate tax exclusion limit is $5 million, meaning that families do not have to file an estate tax return unless their inherited estate exceeds $5 million. Once the exclusion limit is exceeded, estates are taxed at a 35 percent rate.

Current law excludes many more estates from the tax than 2001 estate tax rates, when the estate tax exclusion limit was $1 million and the tax rate was 55 percent. If current rates were allowed to expire and revert to 2001 rates, these levels would require many more families to file estate tax returns.

To avoid these dramatic changes to estate tax exclusion limits and tax rates, some in Congress would like to find a more moderate solution, like the limits and rates used in tax year 2009. That year, the estate tax exclusion limit was $3.5 million and the tax rate was 45 percent. Though more families would be required to file estate tax returns under 2009 rates than current rates, it excludes many families that would be required to file under 2001 rates.

Hopefully, Congress will come to a consensus on the estate tax rates and not allow them to revert to 2001 levels, which would greatly reduce the amount families would collect from a loved one's estate. If you or a loved one has questions about the tax issues concerning the estate, please consult an experienced estate planning attorney.