01/12/2010

We all know the tired phrase, “All that is certain is death and taxes.” As of January 1, 2010, while death remains a certainty, the taxes surrounding it are anything but certain. The Estate Tax was not repealed…it just goes away for a year and then it comes back on January 1, 2011 with a decidedly turn of the century vibe (ala 2001, to be exact).

Here is what happened. Back in 2001, the Republican-controlled Congress looked at the significant budget surplus that had been amassed and decided that some of that money ought to go back to the taxpayers from which it came. OK – not a bad thought. After all, economists were predicting another rich decade, trillions of dollars of even more surplus under the current tax laws of the 90s. So Congress passed a relatively partisan plan to return around $1.3 trillion by way of tax cuts over a ten year period. Of course, the hope was that the surpluses would go on and on forever, filling government coffers while allowing taxpayers to keep more of their hard earned money. It felt like a win/win proposition. The estate tax was part of the plan to return money to taxpayers wherein “small” estates would escape taxation on a phased in basis, ramping the exemption from $675,000 in 2000 up to $3.5M in 2009. Under the prognostications in early 2001, there would be no need to collect estate taxes in 2010. Then if all was good, the tax breaks would become permanent. And if things were not so good, well, we could always return to the 2001 model of tax collection to refill Treasury (and of course, there is the “long” answer which involves a lot of politics…).

As the years went by, the surplus was drained and the economy, based on very faulty assumptions (in hindsight, an understatement) went into decline – no doubt exacerbated by the threat of terrorism and the reality of war, issues that were not anticipated by Congress. Then as the tax breaks began to unfold over the decade, no one thought of staunching the outflow of money (ie raise taxes or actually decrease federal spending—both wildly unpopular politically). In the background, the estate tax marched on to 2009 and indeed the amount exempted from taxation was $3.5M in that year—enough to shelter most estates in America, and probably all estates of the solidly middle class—yay! A Middle Class Tax Relief Reality. Remember that $3.5M for a married couple with a little basic estate planning really means up to $7M (that is $3.5M for each spouse) and $7M even today is a lot of money.

2010 loomed large on the horizon last fall and all of us in the tax “biz” were pretty sure Congress would not allow 2010 to dawn without estate tax. And sure enough, at the eleventh hour, November 2009, the House of Representatives on a straight partisan line voted to set the estate exemption at $3.5M per spouse with 45% max estate tax rate. Not one Republican voted in favor, and more than a few Democrats voted against the bill because they thought the max estate tax rate should be HIGHER. It went to the Senate and all heck broke loose. Senate Democratic leadership pled for adoption of the House bill without change, citing that Americans needed stability and certainty regarding estate tax law. Republican leadership demanded $5M exemption level, portability (which means that a surviving spouse can use whatever the decedent spouse didn’t use, thereby guaranteeing a $10M estate exemption), and a 35% max rate. Over the past 10 years, Dems and Reps alike have proposed legislation that embraces bits and pieces of both of these positions. However, the Democratic leadership said No Way. And everything stalled.

Where does this leave us, the American Taxpayers? The honest answer is “Who knows?” Most tax experts (disclaimer: I am not an expert in estate tax law) fully expect Congress to act soon and retroactively to reinstate the estate tax at some compromise between the hard line Dems and the hard line Reps. A lot of politicos don’t expect any movement until after the fall elections…so…not until we are just about to re-enter the “turn of the century” scenario of $1M exemption and 55-60% max tax rates.

What we are left with is UNCERTAINTY. CHECK INTO TOMORROW’S BLOG FOR PART II – HOW THE ABSENCE OF ESTATE TAX AFFECTS US AND WHAT WE PROBABLY OUGHT TO DO WHILE WE WAIT FOR CONGRESS TO ADDRESS THE NEEDS OF ITS CONSTITUENTS – DURING AN ELECTION YEAR. REMEMBER – NO ESTATE TAX DOES NOT MEAN NO TAX. There are always taxes…but who is going to get taxed? You are not going to like the answer.