Analysis of the Federal Estate Tax in the US - Research Paper Example

Gift and Estate Taxation Beginning in 2001 to 2009 there was a complete removal and repeal of the Federal Estate tax. If your spouse died during the period of December 31, 2009 to December 31, 2010 this would have had an effect on your taxes. Though many believed that congress would pass an act before this actually happened voting in a permanent maximum estate tax this did not happen. Just as promised by George Bush, the United States saw the year 2010 without any ‘death taxes.’ (Yokomoto, 2007, p47) This is a result of the Economic Growth and Tax Relief Reconciliation Act of 2001. On January 01, 2011, these taxes changed yet again. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, P.L. 111-312 was signed into law by President Obama on December 17, 2010(http://www.gpo.gov/fdsys/pkg/BILLS-111hr4853enr/pdf/BILLS-111hr4853enr.pdf). This Act focused on various temporary tax measures, and also temporary estate tax relief (http://www.gpo.gov/fdsys/pkg/BILLS-111hr4853enr/pdf/BILLS-111hr4853enr.pdf). 2010 saw two separate tax rules. The default estate tax rate provided an exemption of five million dollars or ten million for married couples with a tax rate of thirty-five percent. Property value was increased or decreased according to the fair market value (Sarje, 2011). As an alternative and because of the Economic Growth and Tax Relief Reconciliation act there was no estate tax for descendants of those who died in 2010. If this was chosen by the executor assets in the estate received modified carryovers. The alternative was short lived, going from 0% in 2010 back to a rate of 35% in 2011. The gift rate is now also a maximum of 35%, in sync with the estate tax (Ransome, Shafer, 614). The gift tax and estate tax exemption is now five million for individuals, an increase from the one million alternative tax exemptions in 2010. This provides benefit to those used to receiving charitable gifts upon individual’s deaths as it is now just as beneficial for individuals to make gifts during their lifetime. Though it was much more advantageous to do so after death before this time they are now more in sync. Some advisors are telling their clients to make very large gifts now, as we do not know what will happen in 2012 (Fried, 2011). No matter the tax change in 2012, gifts given today would still be left out of your estate. It is also suggested that those who may be at risk for malpractice suits should shield up to 5 million in assets by placing them in special trusts. This is also a great opportunity for same sex couples, or those who are unmarried. The major concern or risk is accidental disinheritance. Many people leave inheritance with a formula type of rule, stating they leave however much is not subject to federal income tax withholding to an individual, with the remainder going to a second individual. Now with that amount being so much higher the first individual is getting a much larger amount, possibly leaving nothing for the second individual. This can be especially worrisome if you have been remarried and have children with your first wife that you wish to leave inheritance, as well as taking care of your second wife. Married couples can now also enjoy tax portability. What this means essentially is that widows and widowers no longer must use the trusts they previously did to preserve the federal exemption amount. Prior to this when one spouse died, a trust was set up with the tax free exemption amount, for example; one million dollars, which the remaining spouse would use tax-free and would also transfer to family or friend when they are deceased tax free. Fifteen states and the District of Columbia still have state taxes with no portability so they may still want to use Bypass Trusts. With the Federal estate tax being raised to five million a person married couples can now add unused state tax exemptions from their spouse, deceased from December 31, 2011 forward to their own (Jacobs, 2010). This will allow an individual who is a new widower to have a ten million dollar tax exemption. Portability also applies to lifetime gifts and assets that pass through an estate plan. Lifetime and estate tax emptions can be used as a unified credit to transfer assets at either stage or a combination. The portability is not automatic and the executor of the deceased will need to transfer any unused exemption to the spouse, who can then transfer them through gifts or as assets to their estate. It is important to file an estate tax return when the spouse first dies. You have nine months with a six month extension possible to get this filed. John Gallo believes portability and its benefits to be greatly exaggerated (32). The legal costs and convenience are what is said to be great reasons not to have to set up a bypass trust. Because of the estate tax exemption that must be filed after a spouse dies this may not actually be true. For instance, if the husband passes away with an estate equaling less than two million dollars it would not have been necessary to file an estate tax return because of the five million dollar exclusion. Now the costs must be absorbed for filing this. Not only are the costs of filing the estate tax required it is not yet known what will happen in 2012 and what associated costs or filings will need to be done at that time. Portability is set to expire on December 31, 2012. It is likely to be renewed unless it is simply unworkable. I think we can expect some improvements to it such as the estate tax filing within nine months may be improved upon and minor adjustments made to married portability. What we don’t know that makes this uncertain for many is what will happen in 2012. There are three bills before the US House of Representatives that would repeal this. One of these is the ‘Sensible Estate Tax Act of 2011’ presented by Congressman Jim Mcdermott, of the Ways and Means Committee (http://mcdermott.house.gov/index.php?option=com_content&view=article&id=545:mcdermott-bill-making-the-estate-tax-fair-and-equitable-again&catid=25:press-releases&Itemid=20). This bill does not repel or extend the existing estate tax laws. Mcdermott would like to see the estate tax rates at what they were pre 2001, which would be a maximum 55% with a one million dollar exemption, two million for married couples. He would also like to reunify and ‘make permanent’ portability. Furthermore he plans to require a minimum 10-year period for grantor retained annuity trusts; and, provide meaningful limits to the generation skipping transfer tax exemption (Mcdermott, 2011). Supporters of this bill include Bill Gates, and former investment banker Eric Schoenberg. Mcdermott is a strong believer that the estate and gift tax exemptions pre 2000’s were successful and did not provide a hardship on any individual. A 1998 Joint Economic Committee study on the Economics of the Estate Tax found that extensive costs were associated with the federal estate tax (Mcdermott, 2011). Many family run businesses were put out of business due to this tax. The study states that the federal estate tax had reduced the stock or capital this century by 497 billion dollars and that it is extremely punitive (http://www.house.gov/jec/fiscal/tx-grwth/estattax/estattax.pdf). Being complicated, unfair, and inefficient, the minimal deduction also stimulates no further charitable giving. With this in mind I must wonder to when Mcdermott is referring? President proposes that at the end of 2012 the estate tax goes back to where it was in 2009. His budget would like to lower the state tax exemption to 3.5 million and the gift tax exemption back to one million. If nothing is done with the way that the laws are written the state and gift tax will go way down back to one million. It is clear that now would be a great time to be wealthy and prepare, making solid financial plans for whatever the future may hold while taking advantage of today’s rates. Works Cited "McDermott Bill: “Making the Estate Tax Fair and Equitable Again”." Congressman Jim McDermott - Representing Washington State's 7th Congressional District. 17 Nov. 2011. Web. 02 Dec. 2011. . Fried, Carla. "Estate and Gift Rules: Some Clarity, for Now." New York Times. New York Times, 12 Feb. 2011. Web. 2 Dec. 2011. . Gallo, J.. "Why Portability Isn't a Cure-All. " Journal of Financial Planning  1 Aug. 2011: ABI/INFORM Global, ProQuest. Web.  2 Dec. 2011. Jacobs, Deborah. "Married Couple's Guide To The New Estate Tax Law Page 2 of 3 - Forbes.com." Information for the World's Business Leaders - Forbes.com. Married Couple's Guide To The New Estate Tax Law, 23 Dec. 2010. Web. 02 Dec. 2011. . One Hundred Eleventh Congress of the United States of America at the Second Session. Gpo, 2 Jan. 2010. Web. 2 Dec. 2011. . Ransome, J., and F. Schafer. "Significant Recent Developments in Estate Planning. " The Tax Adviser  1 Sep. 2011: ABI/INFORM Global, ProQuest. Web.  2 Dec. 2011. Sarji, Hani. "New Year, Different Rules: Estate Tax, Gift Tax, & GST Tax Rules For 2011 - Forbes." Information for the World's Business Leaders - Forbes.com. Forbes, 2 Jan. 2011. Web. 02 Dec. 2011. . Saxton, Jim, and Max Thornberry. "THE ECONOMICS OF THE ESTATE TA." House.Gov. Dec. 1998. Web. 2 Dec. 2011. Schimidt, C.. "Estate Preservation. " Best's Review  1 Jul 2011: ABI/INFORM Global, ProQuest. Web.  2 Dec. 2011. Yokomoto, Kristin L. "2010 Estate Tax Repeal, Basis Rules, And Reporting Requirements." CPA Journal 80.12 (2010): 46. MasterFILE Premier. 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