Estate Tax Update

07/23/2010

The estate tax debate (as well as the debate over gifting taxes, generation-skipping transfer tax, and the step up in basis) affects many high net worth families around the country.  Over the past few years, many changes have occurred in terms of the nature of the estate tax.

In summary:

Back in the early 2000s, the Bush administration enacted a slowly-diminishing estate tax.

By 2009, the estate tax fell to a maximum of 45%, with $3.5MM of exemption per person ($7MM per couple).

By 2010, the estate tax had been eliminated.

In 2011, if no legislation is enacted, the estate tax will sunset to its pre-2000 maximum level of 55%, with only $1MM of exemption per person ($2MM per couple).

The current scenario:

Senators Lincoln (D-Arkansas) and Kyl (R-Arizona) have recently put forward an estate tax reform bill.  This bill stipulates that the estate will, over a ten year period, decrease to a maximum of 35%, and exemption will, over a ten year period, increase to $5MM per person ($10MM per couple).

The are of concern is that the sunset clause in the current estate tax law indicates that, if nothing is done, taxes will increase drastically (back to pre-2000 maximums).  The U.S. Government can effectively increase taxes on those with estates large enough to be taxed (and theoretically increase revenue) without going on record to vote for it.

Unforunately, anyone who may choose to speak out against the tax from either party is strongly incentivized not to do so.

-Democrats will not stand up for the bill, as they are looking for any excuse they can to increase revenue to compensate for government spending.

-Republicans who would normally stand up to reduce taxation will not want to go on record "issuing tax cuts to wealthy Americans" for the sake of losing support of the general public.

Conclusion:

The empirical evidence in this matter seems to point that it is most likely that the Lincoln/Kyl bill and, in all likelihood, any other estate tax legislation reform that may be brought up, will most likely fail to pass, as neither Democrats nor Republicans will be likely to rally around it.  We, therefore, will, in all probability, see the estate tax sunset to pre-2000 levels in 2011.

With this in mind, estate planning is more important than ever.