Future of the Federal Estate Tax

Insight into Obama-Republican deal and the estate tax

On December 6, 2010, President Obama announced that he reached a tentative deal with republicans to extend the Bush Tax Cuts and reform the federal estate tax.

The writers and bloggers at Forbes.com have been covering the issue from many angles.  Featured on the Forbes.com webpage are two of my recent blog posts:

There are a number of other blog posts to mention, including:

• Brian Wingfield, How The Tax Compromise Might Affect Estate Planning, Business in the Beltway.
• Hani Sarji, Obama-Republican Estate Tax Deal Draws Criticism: “The Deal Is Unacceptable”, Estate of Confusion.
• Janet Novack, Washington's New M.A.D. Doctrine: Mutually Assured Deficits, Taxing Matters.
• Hani Sarji, Obama Announces Estate Tax Deal With Republicans: 35% Tax Rate And $5 Million Exemption, For Two Years, Estate of Confusion.
• Brian Wingfield, Taxes? Hold 'Em!, Business in the Beltway.
• Brian Wingfield, Statement By The President On Tax Cuts and Unemployment Benefits, Business in the Beltway.

For other coverage of the Obama deal, see Paul Caron, More on the Obama-Republican Tax Cut Deal, TaxProf Blog, Dec. 8, 2010.

Also, Forbes.com writers and bloggers have covered the recently introduced and defeated Baucus proposal:

• Hani Sarji, With Baucus Bill Blocked In Senate, What Now For Estate Tax?, Estate of Confusion.
• Ashlea Ebeling, Estate And Gift Tax Bombshell, The Best Revenge.

(Also note that like other Forbes.com bloggers, I am grabbing the headlines for many of the articles that I am reading.  One of the readers of Estate of Confusion told me that he finds My Headlines Grabs very helpful.  Let me know what you think: http://blogs.forbes.com/hanisarji/headline-grabs/)

Ryan J. Donmoyer (Bloomberg): "Return of Estate Tax Looms as Impediment to Extending Tax Cuts"

On November 29, 2010, Bloomberg published Return of Estate Tax Looms as Impediment to Extending Tax Cuts, by Ryan J. Donmoyer.  Donmoyer highlights different proposals for estate tax reform:

With Obama planning to meet with bipartisan congressional leaders at the White House tomorrow, three main factions have formed in the Senate, none of which has the 60 votes needed to advance an estate-tax proposal. One includes Republicans such as South Carolina’s Jim DeMint who favor permanent repeal. Another is led by Democrats including Majority Leader Harry Reid who support a top rate of 45 percent that would apply after a $3.5 million tax-free allowance. . . .

A third faction, led by Arizona Republican Jon Kyl and Arkansas Democrat Blanche Lincoln and embraced by Republican leader Mitch McConnell of Kentucky, backs setting the top rate at 35 percent after a $5 million exemption.

Donmoyer also lays out the arguments of proponents and opponents of the estate tax.

Donmoyer’s article has received harsh criticism.  In Another Ryan Donmoyer Cheap Shot (The Future of Capitalism, 11/29/2010), Ira Stoll wrote, “[T]he goal of the article doesn't seem to be accuracy; the goal seems to be mocking opponents of the estate tax. It's outrageous. . . . [T]he treatment of Mr. Harbert in the Bloomberg article is a caricature.”

(I found Donmoyer’s article to be timely and informative. You can read the article and its critique it and reach your own conclusion.)

Update:

• See Kevin Staker, Good Analysis from Bloomberg on Impact of Various Estate Tax Exemptions, Also Points Out How Estate Tax Not Being Discussed, Estate Tax News Blog by Kevin Staker, Nov. 29, 2010 (stating that Donmoyer’s analysis confirms Staker’s opinion nothing will happen).

Rep. Pence and Sen. DeMint proposed legislation to permanently repeal the federal estate tax

Rep. Mike Pence  [R-IN-6] and Senator Jim DeMint [R-SC] recently introduced the Tax Relief Certainty Act -- H.R. 6415 (in the U.S. House of Representatives) and S. 3975 (in the Senate).

The Tax Relief Certainty Act would permanently repeal the federal estate tax.  According to Rep. Pence’s website, it would “[p]ermanently repeal the immoral and unfair death tax.”

The Tax Relief Certainty Act would extend other Bush Tax Cuts.  For more, see my blog post on Estate of Confusion: Pence-DeMint Tax Relief Certainty Act (H.R.6415 & S.3975) Would Extend The Bush Tax Cuts.

(I updated Estate Tax Bills in Front of Congress.)

Laura Saunders (WSJ): "lawmakers have pushed the estate tax to the backburner"

On November 20, 2010, the Wall Street Journal published How to Beat the Tax That Won't Die, by Laura Saunders.  This article discusses how the “tax code is giving taxpayers an incentive not to live but to die.”  It also provides a few estate planning strategies.  The following insight about the state of estate tax reform is informative:

Resolution is nowhere in sight, although Congress is expected to raise the 2011 exemption at some point. The Bush tax-cut extension has lawmakers so tied up that they have pushed the estate tax to a back burner. According to BNA's Daily Tax Report, Senate Finance Committee Chairman Max Baucus (D., Mont.) said on Nov. 16, "We're barely talking about it, let alone ready to make a decision."

Richard H. Thaler (NY Times) argues for 45% estate tax rate, $3.5M exemption (indexed for inflation)

On November 6, 2010, the New York Times published Estate Tax Issue Offers Quick Test for Congress, by Richard H. Thaler.  The article appears in the Business section under “Economic View.”  The article is Thaler’s view on the estate tax.  Thaler is comfortable taxing the wealthy and giving tax breaks to the middle class:

Right now, no one has any idea what rules will be in place in January — or even how to interpret some particulars of the current rules, as we shall see. (And if Congress does nothing, rich relatives might want to watch their backs on New Year’s Eve.) . . .

If Congress had simply indexed the 2009 limit to adjust automatically for inflation, and left the tax rate at 45 percent, we would have a reasonable law in place and would have avoided a decade of uncertainty. . . .

What should Congress do? The most important step would be to end the uncertainty by legislating a permanent set of rules. If Congress doesn’t act, even middle-class households might soon be facing an estate tax. And of all the taxes in our system, the estate tax probably requires the most advance thought. (It is called “estate tax planning,” after all.) To avoid future showdowns in Congress, the exemption should be indexed for inflation if the estate tax remains. . . .

We could lower the rate if we also lowered the exemption, but that would be a mistake. Dealing with the estate tax is a major nuisance, so it should apply to as few people as possible. . .

So let’s be serious. There are lots of ways to spend $250 billion. Trim the deficit, improve education, support the troops, or make sure heiresses like Paris Hilton have the proper attire for trips to St.-Tropez. At this time in our history, which of them seem prudent?

Tom Herman (WSJ): "Nobody knows what will happen [to the estate tax] . . . But there is a compelling reason to expect some action"

Tom Herman answers the pressing question: What Will Happen to the Federal Estate Tax? (Wall Street Journal, 11/7/2010).  Here is part of his answer: 

Q: In reading about what will happen to the Bush tax cuts in 2011, the federal estate tax is never mentioned, in my experience. Why so, and what should we expect?

—N.M., Santa Cruz, Calif.

A: The strange saga of the federal estate tax, dubbed the "death tax" by its foes, has drawn growing attention lately. Nobody knows what will happen -- even though the midterm elections now are history. But there is a chance that Congress finally will take action in coming weeks when lawmakers return for a lame-duck session.

Naturally, you can't rule out the possibility that Congress will do nothing. Gridlock seems like Washington's natural state these days. But there is a compelling reason to expect some action: If Congress does nothing, the nation will face a bizarre set of circumstances.

Kay Bell: "Now it's looking like there will be a true fight to kill the [estate] tax forever."

On November 4, 2010, Kay Bell posted Will the estate tax stay dead? on Taxes Blog (a Bankrate.com blog).  Bell writes that because of the mid-term election results, "it's looking like there will be a true fight to kill the tax forever":

Pre-election conventional wisdom was that Congress would keep the estate tax, but bump up the exemption amount to $3.5 million and drop the tax rate to 45 percent or lower. Now it's looking like there will be a true fight to kill the tax forever.

If the estate tax does survive in the lame-duck session, expect the repeal battle to begin in earnest when the new 112th Congress is seated in January.

But Bell is "skeptical" that the estate tax will be permanently repealed:

So will the estate tax truly die? I'm still skeptical.

As much fun as some lawmakers have chanting 'Kill the death tax,' the levy still brings in a lot of tax money. And the 112th Congress will contain a lot of folks who won their seats by promising to reduce the deficit.

If members of Congress are forced to choose between keeping tax rates low for the living and taxing the estates of the dearly departed, I'm putting my money on laws that will benefit the taxpayers who will still be around to vote again next election day.