Will the federal estate tax ever be repealed?  During 2001, a tax bill was enacted that will slowly phase out the federal estate tax until January 1, 2010, when the estate tax will be repealed. The tax will be repealed for only one year, however, because the tax bill also includes a "sunset provision," meaning that the entire tax bill will become history as of January 1, 2011. At that time the old estate tax law (with a $1,000,000 exemption and a maximum 55 percent tax rate) will once again be in effect on January 1, 2011, unless Congress and the President take action to extend the repeal.  To date Congress has not taken action on this issue and a decision is not likely until the new Congress convenes in 2009. 

Under current tax law, the exemption amounts will be increased until 2010 as shown in the table below:

Year of Death	Exemption Amount
2002	$1,000,000
2003	$1,000,000
2004	$1,500,000
2005	$1,500,000
2006	$2,000,000
2007	$2,000,000
2008	$2,000,000
2009	$3,500,000
2010	Repealed
2011	$1,000,000

Before the 2001 tax bill was enacted, estate tax rates ranged from 37 percent to 55 percent, and some estates paid a higher percentage. The current tax rate is 45 percent, which is still among the highest tax rates in this country. (For comparison purposes, the highest income tax rate is 35 percent.) The rates included in the 2001 bill are as follows:

Year of Death	Maximum Tax Rate
2002	50 %
2003	49 %
2004	48 %
2005	47 %
2006	46 %
2007	45 %
2008	45 %
2009	45 %
2010	0 %
2011	55 %

The gift tax will not be repealed. Although the estate tax is being repealed, the gift tax will not be repealed. A new $1,000,000 lifetime exclusion from the gift tax will be allowed per person (starting in 2002), and the tax rate will be the same as the highest income tax rate in effect at the time the gift is made. In 2010, assuming that the estate tax is repealed at that time, the gift tax will be 35 percent.  Why wasn't the gift tax repealed along with the estate tax?  Congress is well aware that estate planners would welcome an opportunity to shift assets from older to younger generations if there was no gift tax. 

Depending on the size of the estate, not all appreciated assets will get a new basis at death, starting when the estate tax is repealed in 2010. Currently, assets owned by a decedent are appraised at death, and the basis changed to the new appraised value. For example, if someone bought a house for $50,000 many years ago (and has not made any improvements to it, or depreciated it), the basis for capital gains purposes is $50,000. But if the owner dies, the basis is stepped up to the fair market value of the property as of the date of death. If the appraisal shows that the fair market value is $2,000,000, for example, that becomes the new basis under current law. Under current law, the decedent's children could inherit the property, sell it for $2,000,000, and pay no capital gains taxes.

As of 2010, that step-up in basis would be eliminated, except that $1,300,000 in transfers to beneficiaries (other than a spouse) would receive a step-up in basis, and $4,300,000 in transfers to the decedent's spouse would receive a step-up in basis. Transfers in excess of these amounts would have a carry-over basis.