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Estate Tax Law Changes Are on the Horizon: Part One

Our readers in Texas may not have thought about estate taxes unless they have done estate planning. An estate tax is a federal tax on the inheritance that is received by beneficiaries after someone dies. There are many rules that apply, and the rules keep changing.

Unless something happens in Congress prior to December 31, the estate tax rate will change. This is not unusual because it has changed frequently over the decades including the year 2010 when there was no estate tax at all. It would be wise for our Texas readers to be prepared for this potential tax law change. But first, we'd like to share a little history.

The first tax resembling an estate tax was passed in 1797. It was called the Stamp Act and was repealed in 1802.

In 1997 the estate tax exemption, or amount you could pass to heir tax free, was $600,000 as it had been for many years. After that amount the remainder would be taxed at a rate of 55 percent. In 2001 the Economic Growth Tax Relief Reconciliation Act was passed and the exemption amount and tax rate changed. By 2009 the exemption amount was $3.5 million and the tax rate for inheritance of more than that amount was 45 percent.

Remarkably Congress couldn't agree on changes and so in 2010 there was no estate tax at all. Famously George Steinbrenner died that year and his entire estate passed to his heir tax free. In our own state, Texas oilman Dan L. Duncan was able to leave his entire estimated $9 billion to his heirs tax free.

Currently the exemption rate is set at $5.12 million with a tax rate of 35 percent. However, once again Congress is poised not to act. If they do not act, when the current tax cuts expire, the estate tax rate will revert to a $1 million exemption and a 55 percent tax rate for any amount above that.

In our next post we will offer a few strategies to deal with the potential estate tax law change prior to December 31, 2012.

Source: NorthJersey.com, "Neumann: Some looming changes in the estate tax law," Randy Neumann, Aug. 17, 2012

At our Dallas law firm we represent individuals and businesses solve their tax issues related to tax law changes such as those mentioned in this posting.

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