George Steinbrenner, the owner of the New York Yankees whose net worth was estimated to be over 1 billion dollars, died in 2010. If he had died in 2009 he would have owed over ½ billion dollars in Federal estate taxes. However in 2010, for the first time in over 90 years, there was no federal estate tax. However, it returned in 2011 with some changes.
Q: What was the Federal Estate tax in 2009 and 2010?
A: When the Bush tax bill was passed in 2001, the Federal estate tax or as some call it, the death tax, was phased out over ten years and expired in 2010. However when the law was passed in 2001 most of the tax cut provisions that were part of that law expired in 2011 including the repeal of the estate tax. So in 2009 a single individual could escape Federal Estate tax if his estate was $3.5 million or less. Married couples could double the Federal Estate tax exemption to $7 million. In 2010 there was no Federal estate tax.
There have been even bigger examples than George Steinbrenner. A Texas oil billionaire named Dan Duncan with an estate estimated at over $9 billion dollars died in 2010. If he had died in 2009, his estate tax would have been over $4 billion dollars. But in 2010, there would be zero Federal Estate tax. However, these Estate tax savings came at a cost. Whereas up through 2009, there were Estate taxes to pay, there was also a capital gains tax savings. The basis of appreciated assets owned at death "stepped up" from the lower purchase price to the higher fair market value as of date of death. Then, when the assets were sold, there would be little or no capital gains tax to pay. When the estate tax disappeared, so did the step-up in basis. So, the Estate tax was actually replaced by a higher capital gains tax.
Q: What did Congress change in 2011?
A: Congress passed a new Federal Estate tax law at the very last minute in 2010. The amount exempt from Federal Estate tax increased to $5 million dollars per person, up to $10 million for a married couple. Plus, the step up in basis was returned. Congress also will allow people to choose between the 2010 law or the 2011 law for decedents who died in 2010. Plus, they also allow sophisticated planning by allowing the second spouse to die to use the entire exemption for both spouses under certain conditions. Sounds good, but the new choices really makes Federal Estate tax decisions very complicated. Planning has to be undertaken very carefully now.
Plus, the tax law was only passed for two short years. Soon we will be back in the same position as we were in 2010, with no certainty in the future Federal Estate tax laws. Planning will be filled with questions again. AND, don't forget about the Ohio estate tax.
Q: How much is the Ohio estate tax?
A: Ohio only exempts $338,333 from the Ohio estate tax. Anything above that can be taxed up to a 7% tax rate. Again with the proper planning a married couple could more than double the amount that is free from Ohio estate tax. So even if you have an estate of under $5 million dollars and avoid Federal Estate taxes, you could still owe some Ohio estate taxes.
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