Because of tax law changes implemented in 2001 during the first term of the Bush Presidency, the federal estate tax is set to expire at the end of 2009, if not renewed by Congress.  If not renewed in some form,  it will go out of existence for calendar year 2010.  Then on January 1, 2011, if Congress does nothing in the interim, the federal estate tax ramifications will largely revert to what they were in the Clinton era.

Currently, the federal estate tax exemption is $3.5 million for an individual and $7 million for married couples.  The highest tax bracket for taxable estates is 45%.  Without action prior to the end of the year, the federal estate tax will decline to zero, but only for 2010.  Then in 2011, the highest tax bracket would revert to the pre-Bush rate of 55% and the federal estate tax exemption will decline to $ 1 million.

The House of Representatives has passed a bill that exempts the first $3.5 million for an individual and $7 million for married couples and taxes the amount of estates beyond those amounts at a 45% rate.  The Senate remains divided on the issue. One faction supports making the House version permanent.  Another advocates a permanent $5 million exemption with the excess taxed at a 35% rate.

Because the 2001 law was written so that the federal estate tax exemption for individuals gradually increased from  $ 675,000  to $3.5 million in incremental steps and then disappeared altogether in 2010 only to reappear in 2011 in the amount of $1 million, farmers and small business owners and their tax and financial professionals have had great difficulty establishing estate plans with any degree of clarity or certainty.  Thus, some societies of those professionals have been advocating to Congress that the most important tax reform that it can implement now is stability in the law so that both the exemptions and the tax brackets are fixed.  In that way, gifting programs, the purchase of life insurance to fund the payment of estate taxes, the formation of family limited partnerships, and other measures to enable farmers and small business owners to preserve their family assets across generations can be recommended with the assurance that the law will remain stable.

Given the current emphasis on the passage of health care reform, the war in Afghanistan, and budgetary issues, it is becoming less and less likely that Congress will take action before the end of 2009.  It would not be surprising, however, for Congress to pass legislation in 2010 that is made retroactive to January 1, 2010, that permanently establishes an exemption level and top tax bracket that represent a compromise between the two positions being advocated in the Senate.