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As Senate deal breaks down – probability of $1M estate tax exemption rises

BY RONALD A. FATOULLAH, Esq. and STACEY MESHNICK, Esq.
The federal estate tax was repealed for the year 2010, but in 2011 the tax is supposed to return at even higher levels than in 2009. In 2009, estates valued at less than $3.5 million were exempt from federal estate tax (the limit for a married couple was $7 million), while estates above that value had a maximum tax rate of 45 percent. If the current law remains unchanged, in 2011 the federal estate tax will return, with the exemption lowered to $1 million and the maximum rate increased to 55 percent. However, the government is trying to achieve an agreement regarding current estate tax proposals.

An agreement between Senate Democrats and Republicans on an estate tax proposal has broken down, according to one of the lead negotiators, Senate Minority Whip Jon Kyl (R-AZ). Observers say that with each passing day, estate tax legislation that would apply retroactively appears less and less likely, while the probability grows of a return to a 55 percent rate and $1 million exemption beginning January 1, 2011.

Although details of the short-lived deal have not been made public, The Hill reports that lawmakers were looking at a tax levy of 35 percent for those estates valued at more than $3.5 million, with the exemption ultimately increasing over time to $5 million with no index for inflation. Taxpayers would reportedly have been given the option of prepaying their estate tax, with prepayment trusts paying a lower rate.

According to Kyl, an agreement happening anytime soon seems unlikely, with GOP members holding firm for a $5 million exemption with a 35 percent tax rate.  However, “80 percent” of Senate Democrats oppose this plan, according to Senator Bob Casey (D-PA).

Casey said, “Most of our caucus is very concerned about what will happen on the estate tax, and I think there are some who would probably be with Senator Kyl, but I think it’s a small number.”

It seems unlikely that we will see any estate tax legislation before the November elections, and that retroactive legislation becomes less likely every day. It is important to note that there also is a New York State Estate Tax on estates of $1 million or more, but the tax rate is much lower and starts at approximately 5 percent. But the New York State estate tax, along with the federal tax, can cause some estates to be taxed at over 60 percent! Individuals with assets over $1 million should strongly consider implementing estate tax planning strategies that can lower or even eliminate estate taxes.

Ronald A. Fatoullah, Esq. is the principal of Ronald Fatoullah & Associates, a law firm that concentrates in elder law, estate planning, Medicaid planning, guardianships, estate administration, trusts and wills. The firm has offices in Forest Hills, Great Neck, Manhattan, Brooklyn, and Cedarhurst, NY. Fatoullah has been named a “fellow” of the National Academy of Elder Law Attorneys and is a former member of its Board of Directors. He is also a member of the Executive Committee of the Elder Law Section of the New York State Bar Association.  Fatoullah has been certified as an Elder Law Attorney by the National Elder Law Foundation. Fatoullah is a co-founder of Senior Umbrella Network of Queens. This article was written with the assistance of Stacey Meshnick, Esq., who supervises the Medicaid Department at the firm.  The firm can be reached by calling 718-261-1700, 516-466-4422, or toll free at 1-877-ELDER-LAW or 1-877-ESTATES.

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