As an Estate Planning Specialist, many people ask me what I think is going to happen with the Estate Tax situation in 2011 and beyond. While the estate tax is a major question for many taxpayers, the federal government gets the bulk of its revenue from the income tax system. The income tax system has major changes coming to it that will raise everyone’s taxes next year absent congressional action. That means the income tax has to be the major focus of Congressional tax discussions, debates, and (hopefully) action. For this and other reasons, I feel strongly that the Estate Tax laws will not be tackled in the near future, and that the Estate Tax system will revert to the pre-EGTRRA laws.
EGTRRA is the 2001 Tax Act that phased out the estate tax system by increasing the Exemption levels from 2001 through 2009, with a full repeal of the estate tax in 2010. Because the Republicans in power at the time that passed this legislation did not have sufficient votes in the Senate to make the repeal permanent, EGTRRA “sunsets” on December 31, 2010. After December 31, 2010, the tax code is to be interpreted as if EGTRRA had never been enacted.
Therefore, full reversion to pre-EGTRRA laws will revive the estate tax system, with an exemption from the tax of only $1 million dollars with a top rate of 55% tax on asset values in excess of that $1 million.
There has been some hope (perhaps there is still some) that the “Lame Duck” session of Congress would tackle the estate tax. Probably the strongest reason I believe estate tax legislation is not in the wings for the Lame Duck session is that, regardless of what they say, politicians generally do not like to vote for tax increases. Tackling the estate tax in 2010 would amount to a vote for a tax increase. Waiting until 2011 or later to implement an exemption higher than $1 million allows the politicians to vote for a tax cut. Voting for tax cuts are easier to spin when seeking re-election. For that matter, Republicans are by and large against the estate tax, and will likely prefer to wait until next year when they can have a greater influence on the outcome of any new estate tax legislation.
An anecdotal reason I have no confidence that new estate tax legislation is coming is that the current system is a mess and there has been ample time to fix it. In 2006, there were multiple votes for new estate tax laws that went nowhere. Basically, Congress has shown an inability to address the Estate Tax laws. If the specter of a One-Year Estate Tax repeal was not enough to get Congress to agree on new laws, I have trouble seeing the specter of a $1 million exemption being a greater motivation. Besides, dead people don’t vote (in most elections).
Is an estate tax so bad? On one hand, I say yes, which is why I have chosen a profession to help people reduce their estate tax exposure. On the other hand, the estate tax does provide some societal benefits. In particular, the estate tax promotes charitable giving, the creation of conservation easements, and the motivation for individuals, families and businesses to plan their affairs. Without the estate tax, many taxpayers would miss out on important nontax planning opportunities. For example, an inheritance can be structured to protect the inheritance from creditors and divorcing spouses. The specter of the estate tax motivates people to seek legal advice, which allows the family the opportunity to take advantage of the law, rather than be at the mercy of default legal rules.
Patrick D. Newton is an estate planning law attorney with the law firm of Strauss & Associates, P.A., with offices in Hendersonville and Asheville, North Carolina. His practice touches on nearly all areas of estate planning, including advanced estate tax planning, business succession and estate administration. He is admitted to practice in North Carolina and is a NC Board Certified Specialist in Estate Planning & Probate Law. Read more from Patrick D. Newton at his blog.
- The Estate Tax Changes and You: A Flowchart (press.rocketlawyer.com)
- Top Estate Tax Planning Ideas for the End of 2010 (press.rocketlawyer.com)
- Estate Tax: Is it Bad for Farmers and Small Business? (legallyeasy.rocketlawyer.com)