Schizoid Estate Planners Rejoice: Relief is in Sight

One of the stranger episodes in the world of tax law may be coming to a close, mercifully. In 2000, to fulfill a campaign promise of the new President, Congress adopted an amendment to the Internal Revenue Code; by any measure it was bizarre.

The federal estate tax has long been a political target (critics ominously renamed it the “death tax” to help make their point). Prior to 2000, it had been imposed on estates in excess of $600,000. As far back as the mid-90’s both parties had agreed that the $600,000 exemption should be increased, though many Republicans wanted to repeal the tax entirely; as a result during the Clinton administration Republicans and Democrats never did agree on a formula that could garner the votes needed to pass.

Voila! In 2000 one of the strangest of “solutions” evolved; the personal exemption was increased immediately to $1,000,000 (which effectively exempted estates owned by married couples of up to $2,000,000). Fair enough. Then Congress created a gradual escalation of the exemption over the next decade, so that by 2009 it would grow to $3,500,000 (which is close to the compromise proposed in the mid-90’s). Again, fair enough. Then, by an act of legerdemain worthy of Houdini, they caused the tax to go out of existence altogether in 2010 (hold the cheers) only to be reinstated in 2011 with the personal exemption reduced to the 2001 level of $1,000,000!

For those of us who plan estates it has been something of a nightmare. None of us really expected the law to remain unchanged until 2011 (and members of Congress quite candidly agreed that the 2000 amendment was temporary and that it had to be reviewed), but we have been left to guess what the final formula will be. Congress has taken its good old time getting around to the issue, but it seems that a deal will probably be struck sometime before the year ends.

Efforts are being made to increase the exemption to something like $5,000,000, which would effectively exempt estates of married couples who own assets worth less than $10,000,000 at death. This number is only an estimate at this point, and we must wait for the final product.

There is also an effort to reduce the rate of tax, which currently starts at 18% and is graduated depending on the size of the estate to 47%; the proposed new rate is 15%, though if there is a reduction in the rate, it is likely to be substantially higher than 15%. Our bet is that the rates will remain unchanged.

What is the effect of all of this? The Wall Street Journal estimates that if the personal exemption is increased to $5,000,000, the number of estates which would pay the tax would be decreased from 18,800 this year to 2,500 annually. While the ultimate compromise is yet to be determined, it will be good for all when the current crazy quilt is laid to rest (death taxes, get it?).

— Ken Butera

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