In 2010, and only 2010, the federal estate tax was repealed. What this meant was that the federal government was unable to tax the estate of an individual who passed away in 2010.
Many skeptics would find it hard to believe that the federal government sat idly by this past year and let millions of dollars in taxable revenue slip through their fingers. But this is, in fact, what happened. Famous names such as George Steinbrenner, Dennis Hopper, and Glen Bell (founder of Taco Bell) passed away this year, leaving behind large estates to be passed down to their families, with absolutely zero federal tax implications. From an asset protection standpoint, this lapse in government foresight is a blessing to us all.
But fear not skeptics, in 2011 the federal estate tax will be back in place. No one knows for sure what the tax rate will be, but sources have indicated that the tax could come back at upwards of 55% for all estates over $1 million dollars. This is a drastic change from the 2009 federal tax exemption, which was set at $3.5 million, with a tax rate of 45%.
While some might feel that an estate of $1 million dollars is a pie-in-the-sky dream, when you start adding up the value of a home, a 401K retirement account, and other savings, $1 million is not that far off. Individuals who live in areas with high property values could be especially susceptible. Those people who purchased homes 30 years ago, when property values in the Puget Sound area were much lower, could see significant gains in the value of their homes, greatly increasing the value of their estate and ultimately their estate tax burden.
Despite the 2010 lack of a federal estate tax, Washingtonians are still susceptible to a Washington estate tax on estates over $2 million dollars. In 2011, the possible hike in the federal estate tax, combined with the Washington estate tax, could result in a large tax burden for estates in Washington.
With proper estate planning, these estate taxes can be minimized or possibly avoided. Strategies that involve family gifting or the establishment of trusts can be very helpful in keeping the government from taking what is rightfully yours.
Attorney Jared Bellum is a contributing author to this blog.