Congressional Conferees Decide Probable Future of Estate Tax
Although it's not a binding decision, we have a good idea of the legislation that will eventually be passed. Estates lawyers will live long and prosper.For the past almost eight years, the federal estate tax has been, to use a technical term, crazy. The exemption was increased and is now $3.5 million, and the rates were compressed to a flat 45 percent. But under the current law, the tax is to disappear in 2010, prompting a lot of "let's take grandpa on the roller coaster” jokes. Then, in 2011, the tax was to come back at the pre-2001 rates and exemption level. It's difficult to find a tax policy in such a law. Numerous efforts were made to abolish the tax altogether, mainly for political reasons, but the last significant effort failed just after Hurricane Katrina, when congressional leaders noticed that budget deficits had ballooned and decided that we might need the tax revenues. The change in control of Congress in 2006 and the election of a new president last year takes repeal off the table for a long indefinite future.
But the legislative scheme of 2001 has remained on the books. Now, congressional conferees have agreed on a blueprint of how the estate tax law will be amended. There must still be legislation to carry out the decision, but the substantial Democratic majorities in the House and Senate (the latter recently enhanced) make it likely that such legislation will be passed and signed by the president.
The change will be a simple one -- to extend the 2009 rate and exemption indefinitely. Such a change provides certainty in the tax law, which is a valuable attribute for clients who are doing planning. For example, when the future of the estate (and gift) tax was uncertain, planners were reluctant to suggest to clients that they make gifts that would generate a gift tax liability, postponing planning that could have been beneficial to families in the transmission of wealth.
We won't know the exact terms of the legislation for some time, but there are two aspects of the federal estate tax law that deserve some careful consideration. First, the $3.5 million exemption should be indexed for inflation, assuming we have some in future years. This avoids the necessity of further legislation, with its attendant delays, when higher exemption levels are appropriate. Second, there has been much discussion of portability, which means that if the estate of the first spouse to die can't use the entire exemption amount, the balance can be used by the estate of the second spouse to die. Such a change would simplify planning.
The federal estate tax, in addition to raising needed revenue from those most able to pay, has the effect of promoting careful planning of the passage of wealth through generations, and the claim that it destroys farms and businesses is without a basis in fact. Farms and businesses are lost through poor planning or the absence of planning, and the recent conferees' decision should help promote more and better planning.
