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$10 million, tax-free

By Judy Martel · Bankrate.com
Friday, December 17, 2010
Posted: 1 pm ET

The $858 billion tax package that sailed through Congress this week has left both Republicans and Democrats unhappy with parts of the deal, but the wealthy and their heirs can breathe a sigh of relief -- at least for another two years.

To get the deal done, Democrats conceded on their effort to raise taxes on the wealthy, while Republicans agreed to a stimulus package that expands job benefits for the long-term unemployed and includes a payroll tax cut for workers.

One of the harder issues to swallow for Democrats is the estate tax. It had expired for 2010, and in 2011 the exemption amount was scheduled to revert to $1 million per person, with a maximum tax rate of 55 percent. The bill passed by Congress allows an exemption of $5 million per person, with a maximum tax rate of 35 percent. It also unifies the estate and gift tax (the gift tax exemption has been $1 million, with transfers above that amount taxed at 35 percent.)

So starting in January, a couple can leave $10 million to their heirs, free of estate and gift tax. That translates into a lot of wealthy folks potentially taking advantage of the two-year window by gifting assets to children. The bill also doesn't restrict grantor-retained-annuity trusts (GRATs) to a 10-year minimum term, which President Barack Obama had proposed. GRATs are popular because they allow the transfer of certain appreciating assets, such as stocks, to grow to the end of a pre-determined term of years, with assets passing to beneficiaries tax-free. A 10-year minimum term could have restricted that appreciation.

When the estate tax was enacted in 1916, it was meant to prevent the concentration of wealth in the hands of the super-rich and promote the growth of a middle class. Some say that the Bush-era tax cuts have reversed that process, and the nation's wealth is again in the hands of a few, while the many struggle. What do you think? Should the rich pay more in taxes?

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December 26, 2010 at 2:23 am

I take offense in "The estate tax was meant to prevent the concentration of wealth in the hands of the super-rich..." Their money was not GIVEN to them...they EARNED it!! It is none of the government's business WHAT they do with it, whether they want to hoard it, give to heirs, or all to charity. Socialism was alive and well even in 1916.

Bill Dee
December 22, 2010 at 8:08 pm

All income regardless of source should be taxed at ordinary income rate. After that there should be no further taxes on those funds. That means eliminating all post income taxes. No inheritance, gift, or estate tax. All retirement funds should be Roth type with income tax free and the limits on contributions should be raised or eliminated entirely.