The Uncertain State of US Estate Tax

U.S. citizens, as well as residents of Canada who own U.S. property, are understandably concerned about the current uncertainties revolving around U.S. estate tax.

Back in 2001, through the Economic Growth and Tax Relief Reconciliation Act (EGTRRA), the U.S. government began minimizing the impact of federal estate tax by reducing the tax rate and increasing the size of the minimum taxable estate each year. By 2009, federal tax applied only to estates in excess of $3,500,000, and the tax rate topped out at 45%. When EGTRRA was passed, it included provisions for repeal of the U.S. estate tax in 2010.

The law also came with a sunset clause that gave Congress until December 31, 2009 to extend its provisions. This didn’t happen. Thus, there is currently no federal estate tax imposed on the estates of persons dying in 2010, but in 2011, the old 2001 tax regime is scheduled to be reinstated. This would take the size of an exempt estate down to $1,000,000 from $3,500,000, while the top tax rate moves up to 55%.

Although the House of Representatives voted for a one-year extension of the $3,500,000 exemption in December, the Senate adjourned before the end of the year without addressing the issue. It remains to be seen what action will be taken this year. We would suggest that anyone who is affected by U.S. estate tax may want to revisit their existing estate plans, particularly if division of assets among bene-ficiaries is driven by a tax-based formula.