Two Year Fix for Federal Death Tax Proposed

December 10, 2010

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Two Year Fix for Federal Death Tax Proposed

Reports are that the federal tax proposal announced by President Obama earlier this week will include re-instating the federal death tax in 2011 for two years at a rate of 35 percent for estates valued over $5 million.

There is some not insignificant opposition to this legislative proposal from some Democratic members of the House and Senate.

As many of you know, this is significantly better than it could have been. U.S. Senators Jon Kyl and Blanche Lincoln are to be commended for working in a bipartisan manner to make better of a bad situation.

However, it is an increase from no tax in 2010, and levies for two years a 35% tax on many family farmers, small business owners and others, and still leaves long term uncertainty about the status of this tax after 2012.

Currently, as of January of this year, there is no federal (or Virginia) death tax.  However, leadership in Congress previously had been considering a 45% percent rate for more estates than will be at risk under the Lincoln-Kyl plan.  This “45% percent plan” was also advanced by President Obama in early 2009.

And lack of Congressional action before the end of this month would result in a maximum 55% rate and impacted all estates valued at over $1 million. This, of course, would have impacted hundreds of thousands of families and was an outcome that only the most pro-tax legislators and redistributionists would support.

New Federal Death Tax Plan

There is no actual legislation to review at this moment, so most of what has been put together is via news reports and discussions with some key players. We do understand the broad parameters:

             ·        Tax on assets in estates valued over $5 million at a maximum rate of 35%. 

             ·        Expires December 31, 2012, after which point the tax will increase to 55 percent for all estates valued over $1 million.

             ·        35% Gift and Generation Skipping Tax (GST) rate starting January 1, 2011.

             ·        $5 Million reunified exemption for estate, gift & GST effective January 2011.

             ·        Preserves state tax deductibility for states that impose a state death tax. (Not relevant for our Virginia supporters).

             ·        Preserves valuation discounts and GRATs.


How Does This Impact States In Compliance with Federal Estate Tax Law

In Virginia and other states that are in compliance with the federal estate tax, there will be no impact at the state level. Had the federal government not acted, Virginia and others would have been in the awkward position of collecting state death taxes. That tax burden (an amount equal to the maximum allowable federal credit) could have been used as a tax credit to reduce the federal tax payment by an amount equal to the state tax.


Death Tax Is An Unpredictable Tax & Burden on Job Producing Businesses

Fluctuations in the tax rate and asset threshold has made it increasingly difficult for small business owners and family farmers to plan. The table below outlines the tax rate for the previous few years.


Year                            Tax Rate                                Threshold                 State Tax


2008                           ~45%                                     $2 million                   NO

2009                           45%                                        $3.5 million                NO

2010                           – 0 –                                         No tax                        NO

2011                           35%                                        $5 million                   NO*

2012                           35%                                        $5 million                   NO*

2013 – beyond            55%                                        $1 million                   YES**


*as of the morning of December 7, 2010, it is assumed that there is no federal credit, and thus no state-level tax in Virginia and most other states. This has NOT passed in to law, and only outlines the parameters, as we understand them, of the tax deal announced by the President on December 6, 2010.


** if federal government reverts to pre-2001 tax plan, there will be a state-level estate tax equal to the maximum allowable state tax credit in most states.  This would be as much as 16%, and would reduce the federal tax burden dollar-for-dollar.

Path Forward

It is unclear how this deal will fare in the Congress. Many House Democrats, and to a lesser degree Senate Democrats, seem to be less than thrilled about the deal, especially as it relates to finding a short-term two year fix on the estate tax.

Earlier in the week, in an apparent effort to hold on to Democratic votes in the House & Senate, President Obama is held a press conference discussing the two year tax plan he announced Monday. At that press conference he announced “We’re gonna keep having this fight,” referencing the 2012 deadline on tax issues.

It seems most advocates of the deal are working to expedite the vote, and it is anticipated to take next week in the US Senate.

If you have questions please feel free to call me at 804-775-1928 or email me at , or

Click here to download a copy of the bill: