As many of you already know, Congress partially repealed the federal estate tax by eliminating the federal estate tax for estates of individuals dying during 2010. Prior to the elimination set for 2010, the estate tax was gradually reduced over the years from 2001 to 2009, by increasing the exemption incrementally from $675,000 to $3,500,000 and decreasing the maximum tax rate from 55% to 45%. While the tax is repealed for 2010, the tax is restored in 2011 at the old 2001 rates and exemption levels. This means that in 2011, unless the law is changed the estate exemption level reverts to $1 million.
The Congressional Budget Office recently reported “that if today’s laws and policies did not change, federal spending would total $2.9 trillion in 2008 and revenues would total $2.7 trillion, resulting in a budget deficit of $219 billion. That deficit could increase significantly if legislation is enacted to provide economic stimulus – as is currently under consideration”. Under most conservative estimates there will be budget deficits for several years to come. In this deficit climate is it likely that that the repeal of the estate tax will become permanent? The short answer is no.
When may we expect to see estate tax reform and is there a chance for repeal? According to the Chairman of the Senate Finance Committee, Senator Max Baucus (D-Montana), his Committee will hold hearings in 2008 for a fundamental tax overhaul. But don’t expect Congress to act until 2009 or 2010. According to Senator Baucus, it is a given that the estate tax will not be repealed because there is not enough support in the Senate for such a repeal. And, the Senate is not in a hurry to take up this piece of legislation.
What would be the nature of the estate tax reform? Berkshire Hathaway CEO Warren Buffett, testifying at a Finance Committee hearing in 2007 suggests a $4 million per individual exemption, indexed for inflation, and a starting rate of 45%, increasing to a higher percentage for wealthier individuals. The Republican proposal suggests an exemption of $5 million per individual and a maximum tax rate of 15%. The Democratic proposal argues for an exemption of $3.5 million per individual and a maximum tax rate of 35%. Finance Committee member Sen. Jon Kyl (R-Ariz.) proposes an inflation-indexed, $5 million exemption. Under Senator Kyl�s proposal, estates exceeding $5 million and increasing to $25 million would be taxed at the long-term capital gains rate. Amounts in excess of $25 million would be taxed at 30 percent.
If a repeal of the estate tax is not made permanent, which we feel is the likely outcome, what should we expect? What seems clear is that an estate exemption of at least $3.5 million appears likely. As for rates, we are looking at several possible scenarios with rates starting at 15% and rising to 45%. Beyond that it is anyone’s guess.
– Bruce Royal