Estate Tax - Repeal and Retroactive Reinstatement Now Seem Likely

 I had previously reported that a one-year extension of the federal estate tax seemed likely in an end of year defense spending bill.  Now, Hani Sarji reports that it is likely Congress won't act this year, but will act next year and reinstate the estate tax to January 1, 2010 in some form.

In Estate Tax Fix Fails, Repeal Likely - US Lawmaker (Dow Jones Newswires, 12/15/09), Martin Vaughan reported the following:

Rep. Earl Pomeroy (D., N.D.), said plans to include a temporary estate tax extension in end-of-year defense spending legislation have been dropped because of Senate opposition.

As a result, he told Dow Jones Newswires, the estate tax will be repealed on Jan. 1 as foreseen by current law, and replaced with an onerous capital gains tax that heirs would have to pay when they sold any inherited assets. . . .

It is regrettable that we're going to have this disruptive period without a permanent resolution," Pomeroy said.

But he said "the prospects are 100%" that Congress will come back next year and reinstate the tax, and make it retroactive to Jan. 1, 2010.

My issue with repeal and retroactive reinstatement is what happens to the person who dies before the reinstated law is passed?  From a planning perspective, I know Congress won't leave well enough alone, and the reinstated law will not be identical to the current law, which means that for the person who dies during the gap time will have lost an opportunity to fully plan their estate.  See a prior post on my other thoughts on retroactive estate tax reinstatement.

Image: Salvatore Vuono / FreeDigitalPhotos.net

Estate Tax Update - One Year Extension Seems Likely

Even though the House passed a measure for a permanent extension of the estate tax at a $3.5 million dollar exemption per person, sources are reporting that the Senate is looking to push through a one-year extension by year end.  This would mean that the estate tax exemption would be $3.5 million per person in 2010, but still come back at a $1 million exemption in 2011.

Elder Law Answers reports that "Congressional watchers are coalescing around the prediction that the Senate will likely pass a one-year extension of the estate tax before year's end -- probably as part of a defense spending bill."  It cites in in-depth discussion at OMB Watch why the Senate won't likely move for a permanent resolution in the way of the House.  OMB Watch notes "The other option is for the Democratic leadership to tack a one-year estate tax extension onto a likely omnibus appropriations bill that insiders say Congress will pass before the end of 2009."

CNN Money concurs with the one year extension, advising "The Senate is likely to rally around a short-term fix and pass a one-year extension of the tax at 2009 levels by Dec. 31."  Hani Sarji at his blog reports that the House is now even expecting a one year patch, their recent legislation notwithstanding "'According to House Majority Leader Steny Hoyer, estate state tax fix may be temporary and may be attached to defense spending bill".

Why all this pressure?  Well, besides the financial incentive in certain circles for mom and dad not to survive 2010 intact, a permanent change to a $3.5 million exemption would actually add to the deficit.  CNN Money clarifies this point:

The House bill would increase the deficit by $234 billion over 10 years, according to the Joint Committee on Taxation. That's because even though current law would repeal the tax for one year, it reinstates it by 2011 at an exemption level of just $1 million, which would mean an increasing number of estates would be subject to the tax as years went by."

 $234,000,000,000.00 - That is a lot of zeros to be giving up at a time the government is broke.  So expect a push for the real question of estate tax reform, not a patch, into 2010.

 Photo courtesy Francesco Mariano

What is Going on with the Estate Tax?

Is the Federal Estate tax going away in 2010, being extended for 2010, or will there be total repeal?  Will Congress get around to addressing it this year (only 30 days left guys)?  Or will we be in total limbo?

I chuckled last week when fellow blogger David Schulman of South Florida Estate Planning Law quipped that "I'm Not Writing About Pending Estate Tax Legislation".  David rightly points out that until something concrete comes to pass, we estate attorneys might as well be reading tea leaves.

Not all bloggers feel that way it seems as this week I came across a blog specifically dedicated to federal estate tax legislation changes, aptly named "Future of the Federal Estate Tax".  Here you will get a summary of every piece of legislation being offered on the federal estate tax, with links to the bills themselves.  Blogger Hani Sarji also pulls together some of the latest commentary, included several op ed pieces that ran in the NY Times this weekend in response to last weekends opinion piece "Protect the Farm, Tax the Manor"

For me, I don't make law, I just try to make it work best for my clients.  I can only hope that Congress recognizes what a mess a one year repeal could be and takes responsible action before year end. (yes - I am aware that "Congress" and "responsible action" do not always go hand in hand).

Estate Tax Being Pushed Back

After a flurry of reports that Congress was going to address the estate tax this week, Derek Jenson posts this week that it is being postponed until at least after Thanksgiving.  Derek comments that this makes the one year extension of the current federal estate tax law (a $3.5 million exemption per person with a 45% rate) virtually a lock - because what else do they have time to do at this point?

Interestingly, Derek comments on how this "band aid" is only going to create more of an issue for congress.  

The 2010 extension is easy. It is a tax increase. What is difficult is raising the exemption and lower the rates for 2011. That will be a tax cut. [snip] It is not difficult to image that a year from now we will still not have a permanent estate tax bill and will be facing another one year extension or a return to the $1.0 million exemption."

Recall that under the current law, while there is no estate tax in 2010, the estate tax returns in 2011 with a $1 million exemption and 55% top rate - so the trade off for one year of no estate tax is potentially agreeing to keep the current level of $3.5 million exemption and 45% permanently (not that anything is ever truly permanent with tax and congress).  

According to the Congressional Quarterly, the cost of keeping the current rates over the next 10 years versus allow the estate tax to go away for 1 year and then come back in at lower levels (ie, if Congress does nothing) is a staggering $233.6 billion over 10 years.  We we are looking at extreme health care costs on top of an already bloated budget - perhaps a do nothing approach may net Congress more dollars in the end.