Unless the Senate acts before the end of the year, wealthy heirs in 2010 will be mourning for their relatives but skipping gaily to the bank: they'll get their multi-million dollar inheritances tax-free.
Under the Economic Growth and Tax Relief Reconciliation Act of 2001, the federal estate tax was gradually lifted from wealthy families, its exemption rising from $675,000 per person in 2001 to $3.5 million in 2009. The tax rate was reduced from 55 to 45 percent. Next year, under the same law, the estate tax disappears entirely -- and then in 2011 is restored to its pre-2002 terms.
In April, 2009, Rep. Jim McDermott (D - Seattle), anticipating the 2010 expiration, introduced an estate tax bill that would have exempted the first $2 million per person received from an estate, and impose a graduated tax on the remaining portion: a 45 percent tax up to $5 million, 50 percent between $5 and $10 million, and 55 percent in excess of $10 million. It would also have indexed the exemptions to inflation.
The House, however, last week passed a less progressive estate tax bill by a 225-200 vote, with 25 Democrats joining the Republicans in opposition. President Obama supported this bill, which makes permanent the 2009 tax rate on estates and the $3.5 million exemption. The House bill is not indexed to inflation, so as time passes more estates would be exempt.
It is doubtful that the Senate, focused on other work, will take up this legislation before the Jan. 1 deadline. Unlike the House, rules in the Senate require the body to specify how it will pay for new laws, so its bill would probably be less generous, given the current level of the national deficit.