Estate Tax Exemption and Heir Liability

While several philanthropists donate money and artwork to museums out of the goodness of their hearts, there often is also a tradition of giving, a sense of pride, and at least some incentive in the form of tax deduction. However, with the current ambiguity of estate tax in our country at this time, museum directors are left wondering just how influential little or no inheritance taxes will be on donations for those with heir liability in mind.

A recent Huffington Post article discusses the effects of there being no inheritance tax for 2010 in relation to museum donations and people devising their wills. While many museum donors are drawn to providing gifts so that they can lower an heir’s tax liability, which works out beneficially for museums, without an inheritance tax for 2010, this incentive’s power diminishes. According to the article, Congress did not pass legislation last year that would reform the transfer tax system. The Economic Growth and Tax Relief Reconciliation Act of 2001 made it so that estate tax exemption slowly increased from $675,000 in 2000 to $3.5 million in 2009. Although the House of Representatives passed a bill that would solidify estate tax levels of 2009 with $3.5 million excluded and a 45% tax rate, the Senate did not act in time, thus repealing an estate tax for 2010.

So with there being no current inheritance tax while the future of exemption value remains undetermined, some donors may find their previous plans altered along with the legalities of their estates and wills. It is important to note that while an estate may not be obliged to pay federal estate taxes in 2010, certain state estate taxes may need to be paid by an estate. That is why no one should disregard inheritance tax liability or state estate tax, since some states gather either one or both of these taxes. Most state estate tax exemptions amount to $1,000,000 or lower. In other cases, an heir may need to pay a specific state inheritance tax.

As citizens await a decision from Congress, those establishing or revising their will may want to divide their will to adhere to financial conditions in the current year and what they would want for after 2010. And while developing a firm understanding of inheritance tax is quite the challenge, the gift of giving to help support non-profits and museums hopefully will not be lost.