On December 6, 2010, President Barack Obama of the United States announced a potential agreement with the opposition Republicans that would result in an extension of the Bush era tax cuts and a compromise on the US estate tax for two years which appears to commence January 1, 2011. Of major interest to clients and friends of our firm is that the US estate tax, pursuant to the terms of the deal, would have a top tax rate of 35 percent and a $5M exemption for US citizens. The proposed provisions of the US estate tax appear to be what the Republicans were hoping for (and better than the 2009 estate tax rate of 45 percent and the exemption of $3.5M) and therefore this appears to be a significant concession on the Democrat part. It has been reported that Obama was not happy with the estate tax compromise. In addition, long term capital gains and dividend rates are to remain at 15 percent. Both rates are scheduled to rise if a deal is not reached.
While the deal is not yet passed into law and will be subject to intense scrutiny by both the Democrats and the Republicans, it is hoped that such a deal can be put into place by December 31, 2010. To the extent that the tax deal reached on December 6, 2010 cannot be passed into law, it may still be possible that the US estate tax rate would rise to a level of 55 percent with a $1M dollar exemption and all of the Bush era tax cuts would expire resulting in overall tax increases.
So, for now, we will continue to watch the politicking from the sidelines and hope that the tax cut deal, or a version thereof, will ultimately get passed. As the old saying goes, “the devil is in the details” and certainly we have not yet seen the details. However, based upon the announced deal and various media reports, this certainly appears to be a good step forward in avoiding a 55 percent rate and a $1M exemption for the estate tax effective January 1, 2011.
For friends and clients of our firm, some instant observations come to mind:
- Clients and contacts who are US citizens should review their estate planning once the details are released and passed into law, to ensure it is still appropriate given the lower proposed estate tax rate and higher exemption.
- For non-US persons who own US-situs property, one may wish to review their estate planning as well to see if their existing structures are appropriate. Given the higher exemption level, will it be possible to avoid the US estate tax altogether? The analysis will be very fact dependent.
- US tax rates on dividends and long term capital gains are proposed to remain at a 15 percent level which is good news for people who own, for example, US real estate.
- There still appears to be uncertainty as to what will happen for 2010 decedents. While this subject is beyond the scope of this blog, it is uncertain as to whether there will be rules for decedents to opt-in to the 2009 or 2011 rules to avoid the complicated basis carry-over rules. Stay tuned.
- What will happen January 1, 2013 will be the subject of much speculation. Will this be a subject of debate during the 2012 Presidential election?
There are many other implications that we will certainly consider but, for now, the above are the obvious. We will continue to monitor this space…