Under legislation passed in 2001, the U.S. estate tax exemption level has been increasing and is currently $3,500,000 (2009). These increases apply only for estate tax purposes. (The gift tax exemption remains at $1,000,000, and its use during life also counts against the estate tax exemption available at death.) The Federal estate tax (but not the gift tax) is then scheduled to be repealed entirely effective January 1, 2010, but the repeal sunsets and the exemption amount reverts to $1,000,000 on January 1, 2011.

The maximum rate for the estate and gift tax has also been declining. For 2007, the tax applies at a flat 45% rate. In other words, the first dollars above the exemption level are taxed at 45% and the maximum rate is also 45%. Under the sunset provision, the maximum rate would revert to 55% on January 1, 2011.

It is highly unlikely that the repeal of the estate tax in 2010 and reinstatement in 2011 will actually occur. Although President Bush has advocated permanent repeal of the estate tax, there have been insufficient votes in Congress to enact a permanent repeal. A compromise introduced last year would have increased both the estate and gift tax exemptions to $5,000,000. The bill provided for a rate equal to the long-term capital gains rate (currently 15% and slated to increase to 20% after 2010) for transfers of less than $25 million, and twice that rate for transfers above $25 million. The bill would also have allowed a surviving spouse to use the unused exemption amount of his or her deceased spouse. Although this bill passed in the House of Representatives, it was not brought to a vote in the Senate because the leadership felt it did not have sufficient support to pass.

As a result of the 2006 Congressional elections, the Democrats now have a majority in both the House and the Senate. As neither party wishes to see the 2001 law remain in effect through 2011, conditions seem ripe for a compromise. Although the Democrats may not propose as high an exemption level as was proposed by Republican Congressmen prior to the election, it is unlikely that the exemption level would fall below $2,000,000, and we would predict that a $3,500,000 exemption is more likely. There was opposition from both sides to tying the estate and gift tax rate to the capital gains rate, so it is more likely that a specific tax rate will be stated. We would anticipate a top rate between 35 and 45%. It remains to be seen whether President Bush would veto such a bill, but if the exemption level even approaches the bill that passed the House last summer, there would probably be sufficient votes to override a veto in any event.