Future of the Federal Estate Tax

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).

Amity Shlaes (Bloomberg): "Democrats' Estate Tax Plan Trips Next Secretariat"

On October 27, 2010, Bloomberg published Democrats’ Estate Tax Plan Trips Next Secretariat, an opinion by Amity Shlaes:

The estate tax is one topic getting lost in the dust of the midterm races. That’s a pity. This tax, now quiescent, is set to roar back like a stallion in 2011 if lawmakers don’t rein it in with new legislation.

The destruction caused by the estate tax can be hard to capture. This is partly because the family business dynamic, so affected by the tax, is also hard to describe. Nonetheless, if left unchecked, this levy can trip up not only the workings of a family enterprise but also the general economy. An entertaining reminder of this fact is a film in theaters this midterm autumn. . . .

The 1970s was the bad old estate tax days,” Paul Caron, a tax expert at the University of Cincinnati College of Law, said in an e-mail. “The exemption was only $60,000 ($334,000 in today’s dollars) with a 77 percent top rate. Just as the day’s 70 percent top income tax rate spurred all sorts of aggressive tax sheltering activity, the draconian estate tax rates encouraged the wealthy to spend considerable time and money engaging in various strategies to reduce the estate tax bite.”

The fact that one of those tax-escape strategies might have been the purchase of gentlemen farms like the Chenerys’ doesn’t undermine the larger point: navigating tax obstacles stole precious time from more worthy endeavors.

Paul Caron's lecture, "The Cost of Estate Tax Dithering," is a must-read on estate tax reform

Paul Caron gave the TePoel Lecture and Keynote Address at Creighton University School of Law on April 16, 2010 as part of the Creighton Law Review symposium on Estate Planning: Moral, Ethical and Religious Perspectives. 

Caron has shared the lecture on SRRN: The Costs of Estate Tax Dithering, 43 Creighton L. Rev. ___ (2010). 

This lecture is a must-read for those interested in learning about the reform of the federal estate tax. 

Here is the abstract:

President Obama was widely criticized for "dithering" over the decision of whether to add more troops in the Afghanistan War. Yet Presidents and Congresses over the past decade escaped similar opprobrium for “dithering” in the face of the long-scheduled one-year repeal of the estate tax beginning January 1, 2010, to be followed by the reinstatement of the tax on January 1, 2011. Although the “smart money” agreed after the passage of the Bush tax cuts in 2001 that the Administration and Congress would never allow the repeal-reinstatement scenario to play out, that is precisely where we now find ourselves. In this TePoel Lecture and Keynote Address, delivered at Creighton University School of Law on April 16, 2010 as part of a Symposium on Estate Planning: Moral, Ethical, and Religious Perspectives, I discuss what the failure to enact a new estate tax law by the end of 2009 tells us about the state of our tax law and politics.

The lecture first discusses the history and purpose of the estate tax (and companion gift tax and generation-skipping tax). For eighty-five years, there was a rough consensus that the estate tax raised needed revenue, enhanced the progressivity of the tax system, and helped curb concentrations of wealth, in line with the experience of other countries. But the estate tax consensus evaporated in the United States during the 1990s and 2000s, as anti-tax advocates turned large swaths of the public and politicians against the estate tax, culminating in the 2001 Bush tax cuts (which unfolded in a context very similar to the recent health care reform legislation).

It is especially ironic that the political establishment allowed the estate tax to expire at a time with a greater need than ever for the revenues, progressivity, and wealth redistribution produced by the estate tax. The lecture discusses several consequences of the expiration of the estate tax, including the impact on the timing of deaths and the chaos confronting estate planners, tax lawyers, and accountants during this interregnum period – including the distribution of a decedent’s property where the estate planning documents employ formula clauses tied to the estate tax; the roles of lifetime non-charitable gifts and charitable gifts; the application of the new basis rules in the absence of IRS guidance; and the specter of Congress retroactively bringing back the estate tax. Although a unanimous Supreme Court sixteen years ago (United States v. Carlton, 512 U.S. 26 (1994)) gave a wide constitutional berth to Congress in enacting retroactive tax legislation, each passing day adds to the potential retroactive reach-back and increases the possibility in this Tea Party age that Justice Scalia’s critique of “bait-and-switch” taxation will attract more adherents. The lecture concludes by discussing three recent celebrity deaths – Casey Johnson, Ruth Lilly, and Dan Duncan – and asks whether any of those estates might contest a retroactive re-imposition of the estate tax. In many ways, a successful constitutional challenge would be a fitting denouement to the costs of estate tax dithering.

(Note that the abstract is provided on Paul Caron’s May 4, 2010 blog post, Caron: The Costs of Estate Tax Dithering. TaxProf Blog.  This abstract is very useful and interesting because of the hyperlinks that Caron provides.)

Caron has remarked on his lecture in a number of posts on TaxProf Blog:

• Forbes: How to Protect Your Family From Estate Tax Uncertainty, May 7, 2010 (“Following up on Tuesday's post, The Costs of Estate Tax Dithering: Forbes, How to Protect Your Family From Estate Tax Uncertainty, by Ashlea Ebeling”).
• Death Tax Lives in Estate Repeal for Heir Who Must Sell Assets, May 7, 2010 (“Following up on my recent posts (How to Protect Your Family From Estate Tax Uncertainty and The Costs of Estate Tax Dithering): Bloomberg, Death Tax Lives in Estate Repeal for Heir Who Must Sell Assets, by  Ryan J. Donmoyer & Margaret Collins.”).
• Art Imitates Life: The Estate Tax on Last Night's Law & Order, May 11, 2010 (“Last week, I blogged my Creighton lecture on The Costs of Estate Tax DIthering -- in which I showed a clip from Throw Momma from the Train (originally coined by Paul Krugman to refer to the 2001 passage of the one-year repeal of the estate tax in 2010), discussed two papers showing the impact of estate tax changes on the timing of deaths, and concluded by discussing the estate tax consequences of three recent celebrity deaths (Casey Johnson, Ruth Lilly, and Dan Duncan).”).
• BET Founder Says Carried Interest Tax Increase Would Hurt Minorities May 26, 2010 (“In my lecture . . . I talked about the curious politics behind the estate tax repeal movement, including the important role played by the African-American and LGBT communities in supporting estate tax repeal (as reflected in a West Wing clip).”).
• Texan May be First Billionaire in 95 Years to Pass Estate to His Children Tax-Free, June 9, 2010 (In my lecture . . . I talked about how the estates of several recently departed celebrities -- including Texas tycoon Dan Duncan -- might be treated in the current estate tax interregnum.”).

Fact: selling assets inherited in 2010 will not trigger a federal estate tax

In an earlier entry -- Bloomberg.com article captures the confusion caused by the repeal of the estate tax (5/7/2010) -- I pointed out that a Bloomberg.com article confuses the estate tax and income tax. 

Sadly, the slip is already spreading: 

[1] A May 8, 2010 snippet of the Bloomberg.com article on The News Tribune is titled, Selling inherited assets can trigger estate tax.  It then states, "Those who inherit estates worth more than $1.3 million this year now have to pay capital gains taxes if they sell assets they inherit after the government repealed the estate tax." 

[2] Another blog entry covering the Bloomberg.com article is titled, Death Taxes Persist Even After Estate Tax Holiday.

[Updated 5/8/10, 5:15 PM]

Bloomberg.com article captures the confusion caused by the repeal of the estate tax

On May 7, 2010, Bloomberg.com published Death Tax Lives in Estate Repeal for Heir Who Must Sell Assets, by Ryan J. Donmoyer and Margaret Collins. 

Positives

This article covers the major current issues in wealth transfer planning: uncertainty, confusing rules, the best response (planning or taking a wait-and-see approach), how we got here, and what might be possible. 

The article does a good job of capturing the confusion in the current estate planning environment, but it confuses a couple of key points itself. 

Negatives

(1)The title

The title of the article is somewhat confusing. 

First, the term “death tax” is a politically charged term when it is used to refer to the federal estate tax. 

Second, it is unclear how the “death tax lives in estate repeal.”

• The estate tax is currently repealed for 2010.  Some practitioners argue that it is dead, and others argue it is in hibernation.  Something in hibernation is indeed alive.  It is merely resting.  Describing the estate tax as merely in hibernation, however, has political implications, as it suggests that a retroactively imposed estate tax would be Constitutional.
• People still have estates in 2010.  “[E]state repeal” is probably short-hand for “estate tax repeal.”

Third, the full title is misleading: “Death Tax Lives in Estate Repeal for Heir Who Must Sell Assets.”  If “death tax” means the estate tax, then this statement is not true.  The federal estate tax is repealed in 2010.  If, however, “death tax” means a tax somehow related to a person’s death, the term might make sense, but it requires a number of assumptions.  In 2010, heirs who must sell assets will realize a capital gains tax, if they have built-in gain, and if the executor does not allocate any of the $1.3 million basis increase (or the additional $3 million for qualified transfers to spouses).  This tax would be an income tax.

(2) $1.3 million in inherited assets v. $1.3 million in built-in gain 

The article reflects this confusion between the estate tax and the income tax.  The authors write,

Those who inherit estates worth more than $1.3 million this year face an expensive quandary caused by the repeal on Jan. 1 of the 94-year-old- federal estate tax . . .

A sole heir who inherited assets valued at more than $1.3 million must account for their original cost.

The idea the article is conveying is important: in 2010, heirs must scurry for records to ascertain the basis of inherited assets.  The first quoted sentence is misleading because the focus in 2010 is on the built-in gain in the assets and not on the value of an inherited estate.  The second quoted sentence is misleading because an heir can inherit assets worth $100,000 in 2010 and could still have to account for their original cost. 

Here is the first quoted sentence in context:

Those who inherit estates worth more than $1.3 million this year face an expensive quandary caused by the repeal on Jan. 1 of the 94-year-old federal estate tax, Bloomberg Markets magazine reports in its June issue.

Under a little-noticed twist, these people will owe capital-gains taxes if they sell assets they inherit. And if their loved ones die in 2011, the levies are scheduled to be even higher. Under 2009 rules, which Congress may reinstate, many of them would have paid nothing.

People who inherit assets worth more than $1.3 million this year might or might not have to pay a capital gains tax on inherited assets that they sell.  It depends on the built-in gain, if any.  It also depends on any allocations to increase basis that the executor might make.

The authors write, “Five months into a year that marks one of former President George W. Bush’s biggest tax-policy changes -- the end of what he called the death tax -- confusion reigns.”  Confusion does indeed reign. 

(Special thanks to the watchful eyes of Michael Hepner, a benefits professional, and for his input and feedback.) 

Rep. Levin states retroactive fix for federal estate tax is coming

In House to Begin Extension of Bush Tax Cuts in April (Bloomberg, 3/16/10), Ryan J. Donmoyer reports about Rep. Sander Levin’s intent with regards to the federal estate tax.  Rep. Levin is the acting chairman of the House Ways and Means Committee, and he is considering retroactively reviving the federal estate tax.  Rep. Levin mentions the possibility of letting taxpayers choose the regime -- modified carryover basis or step-up in basis -- that is more beneficial for them: 

Levin also said the committee would begin work to retroactively reinstate a federal tax on multimillion-dollar estates that expired Dec. 31. . . .

“The sooner we do it, the better,” Levin said. The lapse of the levy and a complicated capital gains tax that replaced it was making it hard for families to plan their affairs, he said.

One possibility being considered, he said, would let heirs choose to pay the capital gains tax that replaced the estate levy if that is more beneficial. “We have to write it so we don’t disrupt estate planning in this country,” he said.

Rep. Levin suggests that estate planning has not been disrupted in this country.  It seems he has a different way of measuring the chaos brought by uncertainty.  Also, Rep. Levin’s comments invite practitioners to create enormous dynasty trusts, as such planning might not be disrupted.  So, while Rep. Levin “told reporters today the committee would let lapse lower tax rates for high-earners,” he might be quietly providing high-earners an enormous tax break. 

Kim Dixon’s article -- Tax cuts for wealthy should expire-US panel chair (Reuters, 3/16/10) -- adds one additional item: “Levin also said he backs extending the 2009 estate tax policy for 2010.”

Jay Heflin also summarizes the news in Levin outlines committee agenda (The Hill, 3/16/10):

On the estate tax, the chairman supports extending 2009 law. He also backs giving taxpayers a choice in either complying with current estate tax rules or abiding by what Congress eventually passes. He hedged on whether he would support a lower estate tax, like the one being discussed in the Senate that offers a 35 percent tax rate and $5 million exemption. 

He hopes to address the estate tax soon, saying people need consistency in the law to plan effectively.

Bloomberg video: U.S. Estate Tax Scheduled to Expire at Midnight

In the follow video from Bloomberg (which was uploaded on YouTube on 12/31/09), "Lindsey Arent reports on the U.S. federal estate tax, which is set to expire at midnight tonight and not be reinstated for at least one year."