Ben Franklin said, “In the world nothing can be said to be certain except death and taxes.”
The Greek philosopher Heraclites advised that “the only constant is change.” The 2009-2010 planning environment confirms that Messrs. Franklin and Heraclites were both correct: We are going to experience a change regarding the “death tax,” otherwise referred to as the “estate tax,” but we don’t know what that change will be and we may not know for some time. Consequently, we (and you) need to be alert to Congress’s actions.
Although we may see a change in estate tax law before the end of 2009, many commentators are now guessing that changes will not be made until sometime in 2010. Those changes will be retroactive to January 1, 2010.
Here’s the background on this issue. The past decade has seen a dramatic increase in the amount of money and property that can be passed estate tax free. In 2001, amounts in excess of $675,000 were subject to estate taxation at a 55% rate. (Remember that gifts to a surviving spouse who is a U.S. citizen are not counted in this figure.) Therefore, the tax on the estate of an unmarried individual who died that
year with $1 million would have been $178,750. Since 2001, the amount that is free of estate tax has increased incrementally. If that same individual died in 2009, he or she could pass $3.5 million free of tax, and the excess would be taxed at a 45% rate. What a difference!
Because the Tax Bill enacted in 2001 did not receive 60 votes in the U.S. Senate when it was passed, it will
“sunset” after 10 years. The result is that the tax law will revert in January 2011 to what it was before the 2001 changes were enacted: 55% tax on amounts in excess of $1 million. And if Congress doesn’t act, 2010 will be a year without estate tax—instead, the 2001 law would recapture a portion of lost estate tax revenues with capital gains taxes when inherited property is eventually sold. It’s unlikely this law will ever
become effective. Remember Heraclites’ advice to us.
Where is the action on a new estate tax bill likely to take place? Article I, Section 7, of the United States Constitution provides that all bills for raising revenue must originate in the House of Representatives.
In turn, the House delegates responsibility to the Ways and Means Committee, currently chaired by Charles B. Rangel of New York.
Shelley Berkley (D-NV) recently introduced legislation in the Ways and Means Committee to extend applicability of the 2009 law through 2010 and increase the amount that could pass estate tax free
from $3.5 million to $5 million over the next 10 years. The same day Berkley’s bill was proposed, Chairman Rangel announced that he is drafting legislation addressing the estate tax. However, Rangel’s comments don’t give us much guidance about where the estate tax is heading.
An extension of the $3.5 million exemption through 2010, which would provide Congress time to draft a more permanent estate tax bill, has the support of President Obama. This position was affirmed by the Obama Administration’s “Green Book,” an explanation of its fiscal year 2010 budget proposals. The 2010 Fiscal Year Budget Resolution, passed in April by both the House and the Senate, assumed a freeze of
the estate tax at 45% with a $3.5 million exemption. One key component of this resolution was that it would limit valuation discounts for family limited partnerships and LLCs.
Intertwined in the issue of estate tax reform is the “pay go” system, requiring Congress not to cut taxes or increase Federal expenditures without offsetting, revenue-raising legislation. In other words, with Congress, you can’t have your budget-cutting cake and eat it, too. Therefore, under the “pay go” system, it would be difficult to eliminate estate taxes altogether. When projecting revenues for 2011, the Congressional Budget Office is currently assuming a 55% tax rate and a $1 million exemption.
Congress is faced with a great partisan and ideological divide regarding death taxes. The result could be something unprecedented, or it could be the status quo. None of us know. The best advice we can give you is to take advantage of the Generations program at Foley & Foley. We’ll let you know as soon as we know what impact Congressional action (or inaction) will have on your estate planning.