This year, for the first time since 1915, we have no federal estate tax. The 2001 Bush tax cuts increased the estate tax exemption to $3.5 million and reduced the top tax bracket to 45% in 2009, then eliminated the estate tax entirely this year. There is a catch: The law expires Dec. 31, when we go back to a $1 million exemption and a 55% top bracket.
Few Americans pay estate taxes, nor is it a significant source of revenue for the government. Thanks to increased exemptions, the number of taxable estates has decreased from about 2% percent of adults dying in 2001 to less than a quarter of 1% last year. During the past decade, estate tax receipts averaged just $22 billion, roughly 1% of all tax collections. If the current law remains in place, though, the Tax Policy Institute predicts annual estate tax collections rising to more $60 billion per year by 2019.
One downside to this tax holiday is that this year we also have carryover basis. In previous years, property left to heirs would automatically "step up" to its current fair market value. According to attorney Richard Breed of Boston, carryover basis means that "If you inherit a house or stock from Grandma, you have to figure out what she paid for it. Determining the original cost basis is a horrible job," Breed says. "The burden is on the taxpayer."
WINNERS AND LOSERS
Media magnate John Kluge, No. 1 on the Forbes list of richest Americans from 1989-91, died in September at age 95 with an estimated net worth of more than $5 billion. Oil magnate Dan Duncan, reportedly the world's 74th richest man, died in March with an estimated $9 billion estate. And New York Yankees owner George Steinbrenner died in July with an estate estimated at $1.6 billion. Clearly these heirs benefited.