The Estate Tax (or Death Tax), which levies a 45% top tax rate on couples estates valued over $7 million and individuals over $3.5 million, is slated to expire on Dec. 31st. However, it is also scheduled, like a beheaded hydra, to reappear with more ferocity in 2011, with top rates of 55% for estates valued over $1 million. This makes 2010 a weird twilight zone because it will effectively be without an estate tax. Assuming people don't view this as a can't miss opportunity to dispose of their parents, there could still be affects on investors and their estates.
Many expect some sort of resolution in the near future as the uncertainty which would be caused through the tax's expiration would cause much confusion. People would like to know what to plan for, rather than going into the future somewhat blind. However, the debate on just what the resolution will be is currently becoming more contentious. Many on the right favor either imposing an estate tax with rates lower than those currently or abolishing it all together. Those on the left tend to favor higher rates or keeping the status quo. One possibility currently making the rounds is that congress will pass a law keeping the tax at current levels around March and apply it retroactively to the previous months. As it stands right now, the House has just passed a law which would extend the current rates but this has not yet been ratified by the Senate.
If the tax should expire, the estate tax would be replaced by a capital gains tax on all but the first $1.3 million in inherited assets. Heirs who sell those assets would pay between 15 to 28 percent in taxes on any appreciation in value those assets observed from the date they were acquired. Whether or not this situation is more preferable to that of the estate tax most likely depends on the wide range of situations investors may find themselves in. In anycase, it seems the fates of many depend on the political machine in Washington and its eventual decision.
Note: A little known fact is that one of the largest supporters of the estate tax is none other than the life insurance lobby. Why? Because they make a lot of money through selling life insurance policies which provide liquidity for those dealing with estate taxes
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