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.

What if Congress Doesn't Fix the Estate Tax this Year?

Under the present law the federal estate tax expires midnight December 31, 2009. For the next 365 days death is tax free - but, the federal estate tax comes back as of midnight December 31, 2010. Much has been blogged about the fact that Congress will act this session to change the federal estate tax law, but what if they don't?

Gideon Alper of Gay Couples Law Blog has an excellent post "Estate Tax Repeal in 2010 Not a Big Deal Because Congress Can Pass Retroactive Tax Amendment".  In it, he proposes that if Congress fails to act in 2009, they still have a chance to act in 2010, and can make the law retroactive to dates of death after December 31, 2009.

After all, there is quite a lot on Congress's plate for the remainder of the year: a war in Afghanistan, health care reform, to name a few. Gideon also takes a bit more cynical view noting that 2010 is an election cycle, and although the federal estate tax affects less than 2% of the United States population, it's a great issue for political fodder, and political fodder creates campaign contributions.

I have to disagree that from a planning perspective it would make not make much difference if the estate tax was "un-repealed" retroactively. I base this upon the fact that Congress can never leave well enough alone. I believe that the chance of them making the estate tax retroactive for deaths in 2010 in exactly the same way it currently applies in 2009 to be very small -- if they have to pass the Bill, why not tinker around with the tax code?  After all, there are some good estate tax proposals out there. For example, one looks to defer estate tax payments from working family farms until the family cashes out of the farming business (Family Farms to be Exempted from Estate Tax?").

New Jersey retroactively applied its new "de-coupled" estate tax in 2001. The existence at a New Jersey estate tax separate from the federal estate tax was announced in June 2001, and made retroactive to dates of death as of January  1, 2001. The problem of course, was exemplified by my client who died in March 2001, and never had the opportunity to create an estate planning documents tax effective under the New Jersey estate tax law, because the law did not exist at the time that he in fact died.

The root of the problem here is the political play of passing tax laws that expire --the supporters of the Bill get a "quick win", and it is generally left to another Congress to deal with unwinding of the transaction. The lack of certainty in the tax code creates a planning nightmare -  documents have to be drafted to incorporate the laws that exist today, the laws that are slated to exist in the future, and then best guesses as to what the law might actually be at some point in time in the future.

Congress created this problem -- it's incumbent upon them as responsible representatives of the citizens of this country to fix it -- this year.