There have been rumors circulating ever since Bush first took office that the Estate Tax was headed for extinction. In fact, both John Kerry and George W. Bush made the Estate Tax a point of debate during the presidential election. Yet for many it is still unclear what changes have taken place. The truth is, the Estate Tax is alive and well but slowly on its way out (until 2011, that is).

What is the Estate Tax anyway?

The Estate Tax, called the "Death Tax" by detractors, is a tax applied to a deceased person's estate. Opponents of the Estate Tax argue that individuals have already paid taxes on their property while alive, so it is unfair to tax their estate again upon their death. While this argument sounds reasonable enough, in actuality not the deceased but rather heirs of the deceased pay taxes on the estate-in other words, heirs are taxed on their inheritance.

The Gradual Phase-Out of the Estate Tax

So how quickly-or slowly-is the Estate Tax being phased out? As of 2001, any estate with a value exceeding $675,000 was taxed at a rate of up to 55%. That same year, President Bush signed a $1.35 trillion tax cut package that included a gradual phase-out of the Estate Tax. This phase-out increased the 2001 $675,000 cutoff to $1 million in 2002-03, $1.5 million in 2004-05, $2 million for 2006 through 2008, and $3.5 million in 2009. If you're in a couple, you've got an even better advantage: these numbers are doubled!

At the same time the cutoff increases, the tax rate drops. For example, the maximum Estate Tax rate declined from 55% in 2001 to 50% in 2002 and is set to roll back to 45% in 2007 through 2009. In 2010, the phase out is complete, a complete repeal is scheduled during that year.

If you are one of the "lucky" estate owners who dies in 2010, your heirs have a good chance of escaping the Estate Tax altogether. But there is no guarantee that this inheritance boon will continue beyond 2010. The Act also contains a "sunset" provision that brings the Estate Tax back in 2011. Only a vote from Congress will permanently repeal the Estate Tax. If Congress doesn't vote for a permanent repeal, or simply fails to vote at all, in 2011 the maximum tax rate of 55% will reappear, but the cutoff will increase to one million (see the chart below).

Year	Estate Tax Exemption	Maximum Rate
2001	$675,000	55%
2002	$1,000,000	50%
2003	$1,000,000	49%
2004	$1,500,000	48%
2005	$1,500,000	47%
2006	$2,000,000	46%
2007	$2,000,000	45%
2008	$2,000,000	45%
2009	$3,500,000	45%
2010	-- No in 2010 -
2011	$1,000,000	55%

Boost for the Economy or Just the Wealthy?

Advocates for the permanent repeal of the Estate Tax hold that it will entice wealthy Americans to spend more and bump the economy. Opponents argue these benefits to the rich take trillions of needed dollars out of America's budget, money that could help individual states keep many of their public programs alive.

To make complicate matters, the sunset provision in Bush's 2001 tax package keeps the debate on the Estate Tax brewing in both the House and the Senate.

In June 2003, the House approved the $162 billion "Death Tax Repeal Permanency Act of 2003" in a vote of 264 to 163. If passed in the Senate, the bill would cancel the sunset clause in President Bush's 2001 act, permanently repealing the Estate Tax. While the Senate has yet to act on the bill, it has drafted a similar piece of legislation called the "Permanent Death Tax Repeal Act of 2003." If this Senate bill passes, it too would permanently repeal the Estate Tax. Moreover, the repeal would be accelerated from 2010 to 2005.

With three more congressional elections before 2011, the debate over Estate Tax is sure to continue in both houses of Congress.

LegalZoom is not a lawfirm and can only provide self-help services at your specific direction. Information contained above is subject to change and is not applicable to every state. Visit LegalZoom.com for specific state-by state-documents.

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