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As you may know by now, the Federal Estate Tax has been repealed. Many people are wondering what this means for them. Here is some background to shed some light:

The federal tax on estates in the year 2009 was based on the 2001 Tax Act, a law that gradually reduced the maximum rate of federal estate tax to 45% and gradually increased the amount of property that was exempt from federal estate tax to $3.5 million per person.

Now, for 2010 only, there is no federal estate tax. But, the federal estate tax is set to return again on January 1, 2011, only at a much lower, $1 million, exemption and a higher maximum tax rate of 55%.

While some people think the repeal of the federal estate tax is cause for celebration, others are left in an uncertain and alarming situation. Prior to January 1, 2010, many tax professionals assumed that Congress would simply extend the 2009 provisions, and some anticipate that Congress will act during the next several months to pass a new law that might be retroactive to January 1, 2010. There is concern regarding the constitutionality of a retroactive law, and it will likely be challenged if passed.

The 2001 Tax Act has also created uncertainty for taxpayers regarding capital gains tax liability for inherited property, which will impact more middle class families than the estate tax (more on this issue in our next post).

These changes may require extra planning. Be sure to review your estate plan and speak with your attorney to ensure that your property will be distributed according to your plan, with the minimum exposure to estate tax.

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