As 2009 was coming to a close, it was widely assumed that Congress would prevent the repeal of the estate tax, which was set to expire at year's end and return in 2011. Estate tax attorneys were certain that lawmakers would step in and keep an estate tax in some shape or form.
"Next year, without a change, the estate tax goes away," estate attorney Sandy F. Kraemer said in a September 2009 interview. "And the Obama administration said that will not happen."
But it did happen, meaning that people who received inheritances from people who died in 2010 paid zero tax on the estates. In 2009, estates valued at more than $3.5 million were taxed, with a maximum rate of 45 percent. Now that the estate tax has returned, estates worth more than $5 million will be subject to a tax rate of up to 35 percent for the next two years.
With the estate tax fluctuating so drastically, 2010 was the year to die if you had a lot of money. USA Today estimated that the heirs of New York Yankees owner George Steinbrenner saved $500 million after his death in July. We sometimes think of money issues as life-or-death decisions, but the unpredictable estate tax last year affected not only financial plans but also medical decisions in some cases.
"It put a significant number of people in a holding pattern, not knowing at all what to do," says estate attorney Barry Nelson. "I would not be surprised if some people who had some level of competence made the decision to tell their families -- to the extent that they were on dialysis or something like that -- that it wasn't worth it anymore. 'And if I can save you $50 million, I'm going to do it.'"
End-of-life issues are difficult enough without having to worry about tax rates and exemptions. By failing to maintain a consistent estate tax policy, Congress put even more stress on families during tough times.
"To me, it was a shock and a show of incompetence," Nelson says. "It just shows that the respective parties are at a stalemate and that they are clearly not doing what's best for America."
The current estate tax rates were a part of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, which President Barack Obama signed Dec. 17. As of Jan. 1, estates worth $5 million or less are exempt and will not have to pay any taxes, and those worth more than $5 million will have to pay a tax of up to 35 percent.
For the extremely wealthy -- for example, those with $100 million -- the exemption means little. It's the rate that makes a big difference in how much is left after the government takes its share. Though Republicans favor eliminating the estate tax forever, they were willing to accept a 35 percent rate -- rather than the 2009 rate of 45 percent -- saving a $100 million estate $10 million.
Estate tax attorneys, Nelson admits, have a conflict of interest when talking about how to tax estates or whether the tax should even exist. Some people call them death taxes and say they tax money that already has been taxed. But the unfairness of the fluctuating rate, from 55 percent in 2001 to zero in 2010 to 35 percent in 2011 and 2012, is blatant enough for everyone to see.
"The disparity in the treatment in a billionaire passing away in 2010 and a family member of mine passing away in 2011 -- and the billionaire passing in 2010 paying zero tax and a family member who may have $6 million paying $2.1 million in taxes in 2011 -- it's just absolutely bizarre," Nelson says.