Estate Tax Update: Is it a Good Year to Die?

In the classic 1970 movie Little Big Man, starring Dustin Hoffman, co-star Chief Dan George makes famous the classic Lakota Sioux saying attributed to Crazy Horse before the Battle of the Little Big Horn: It is a good day to die.”

In the movie, Chief George’s character proceeds to lie down solemnly under the vast western sky with the intent of quietly breathing his last. Unexpectedly, it starts to rain, and as the drops pelt the old man’s face he asks his grandson, played by Dustin Hoffman, “Am I still in this world?”

“Yes, grandfather,” is the reply.

“Well,” the old chief concludes, “sometimes the magic works and sometimes it doesn’t. Let’s go back to the teepee and eat.”

Because of a strange quirk in the federal estate tax law and the failure of Congress to take action last year, some estate planners are asking the same question as Chief Dan George, albeit without nearly as much poignancy: Is 2010 a good year to die? In order to understand the current law, we need to review some recent history—history that now seems to have occurred a lifetime ago.

In 2001, George Bush and the Republican Party swept into power. For the first time in over 50 years, one party controlled both houses of Congress and the White House. The Republicans moved quickly to fulfill a campaign promise to reduce income taxes and repeal the Federal estate tax law, sometimes referred to as the death tax. Congress passed a bill that was signed into law in June of 2001 that was known as the Economic Growth Tax Relief Reconciliation Act, or EGTRRA.

Under this law, the estate tax repeal was to be phased in over ten years. The law raised the estate tax exemption amount from $675,000 in 2001 by various increments until it reached $3.5 million in 2009. At the same time that the estate tax exemption amount was going up, the highest tax rate of 55% in 2001 was gradually reduced to 45% in 2009. Finally, the entire federal estate tax was repealed effective January 1, However, EGTRRA was subject to a special Senate rule that required an automatic sunset of the law in 2011 if it was not otherwise changed or extended by Congress.

For years, the national estate planning experts assumed that Congress would not allow the estate tax to completely fade away and that the law would be modified or changed with some compromise between Republicans and Democrats. When the Democrats took strong control of both houses of Congress and the White House in 2009, it was a foregone conclusion that they would not allow the estate tax to be repealed in 2010. But politics is a strange spectator sport, and Congress became focused on national health care and the economy rather than on the estate tax. The House of Representatives passed a bill in
December of 2010 that would have continued the estate tax at a 45% rate on all estates over $3.5 million, but the Senate never got around to voting on the bill before it adjourned for its winter break.

The result? Today there is no estate tax.

But if Congress takes no action on the estate tax this year, the old law will be reinstated effective January 1, 2011, with a tax exemption amount of $1 million and a highest tax rate of 55%. Practically speaking, this means that anyone with an estate exceeding $1 million when they pass away would be taxed at a rate of up to 50% or more for every dollar of wealth passing to the next generation over the $1 million exemption amount. A person with an estate valued at $2 million would pay $435,000 in taxes. A person with an estate valued at $4 million would pay a tax of $1.495 million.

The repeal of the estate tax for 2010 and the possible return of the law as it existed prior to 2001 has left many estate planning experts scratching their heads. At first some of the experts speculated that Congress might pass a bill when it returns from the winter recess, retroactively re-instating the estate tax to Jan. 1, 2010. But the Republican upset in the Massachusetts Senate race and the looming midterm elections next fall have caused more and more members of the estate planning community to conclude that anything might happen in Congress, including nothing.

Indeed, if Congress fails to take any action at all this year, the “Bush” estate tax repeal would expire on December 31, 2010. This expiration of the current law would effectively result in a substantial increase in the estate tax rates in 2011, without the current Congress having ever voted for the tax increase.

At this point, nobody—including the leaders in Congress—really knows what the estate tax laws will look like next year. But there is a lot of money riding on this issue for people who have estates worth more than $1 million. We recommend that our clients stay abreast of developments and keep following our
newsletter for the latest information about the estate tax. If you are concerned about how your estate plan might be affected by the changing tax law, feel free to give us a call. And rest assured, despite the
2010 estate tax repeal, you still have a lot to live for. We don’t think it is a good year to die.