Future of the Federal Estate Tax

BusinessWeek: "Mind the Estate Tax Gap"

On April 15, 2010, BusinessWeek published Mind the Estate Tax Gap, by Amy Feldman.  Feldman highlights how the repeal of the federal estate tax in 2010 could leave some people worse off:  

While heirs of the ultra-rich who die this year may enjoy an estate tax break (17,172 taxable estate tax returns were filed in 2008, according to IRS data), this gap year is having an unintended consequence. Far larger numbers of affluent families who suffer deaths this year could wind up paying stiff capital-gains taxes on inheritances. That's because of the disappearance of what's known as the "step-up" in basis, which allowed assets to be revalued for tax purposes at the time of death. "Many people are going to be worse off than before," says Clay R. Stevens, director of strategic planning at Aspiriant, a Los Angeles wealth-management firm. "If you've only read the sound bites, you've been misled." . . .

Last year the conventional wisdom was that Congress would fix the estate tax problem before yearend. More than three months into 2010, it's clear that even if Congress fixes the rules, it won't happen fast enough to forestall some families' estate tax hell. .

(For a concise summary of this article, see Estate Tax Repeal Consequences, Hahn’s Estate Planning Blog.)

Death of billionaire, Dan Duncan, might make a retroactive estate tax less likely

Dan Duncan died on Sunday, March 28, 2010, at the age of 77 and was “one of the world’s least-know billionaires.”  Russel Gold & Stephen Miller, From Roughneck Origins to Texas Billionaire (Wall Street Journal, 3/30/10).  Duncan was the co-founder, chairman and majority shareholder of Enterprise Products.  He died with an estate that is estimated to be around $9 billion. 

Duncan died in a year when there currently is no federal estate tax.  Scott Martin cogently states, “Washington lawmakers’ estate tax hiatus has now potentially cost the IRS billions in lost tax collections.”  Billionaire’s Heirs First to Win 2010 Estate Tax Jackpot (The Trust Advisor Blog, 4/10/10).

Martin further informs that “probate gurus” believe that the death of Duncan will make a retroactive estate tax less likely:

Experts say death of Texas billionaire Dan Duncan makes retroactive reinstatement of the death tax less likely because the stakes are now a lot higher.

Houston gas pipeline mogul Dan Duncan was the 74th richest person in the world when he died on March 28. If he’d passed away three months earlier or ten months later, his $9 billion estate could have generated up to $4 billion for the IRS. But because there’s no federal estate tax this year, the government gets nothing.

As the first billionaire to die in this year without an estate tax, Duncan presents a tempting opportunity for a revenue-strapped Congress to follow through on threats to reinstate the tax for 2010 and possibly even make it retroactive to the beginning of the year.

However, probate gurus say the sheer amount of money on the table makes a retroactive tax more unlikely. Big estates mean big lawyers ready to fight to see those billions of dollars go to the deceased’s heirs, and the headaches could go on for years.

See also

• Gerry W. Beyer, Black Gold Billionaire Dies in 2010, Benefiting from Federal Estate Tax Repeal, Wills, Trusts & Estates Prof Blog (4/1/10).
• Gerry W. Beyer, Big Estates in 2010 May Be an Incentive Against a Retroactive Estate Tax, Wills, Trusts & Estates Prof Blog (4/13/10).
• Joe Carroll and David Wethe, Dan Duncan, Billionaire Philanthropist, Dies at 77 (Update1), BusinessWeek (3/30/10).
• Dan Duncan, Wikipedia.
• Robert Frank, Oil Magnate’s Death Costs U.S. Millions in Foregone Taxes, Wall Street Journal Blogs: The Wealth Report (4/14/10).
• Clifford Krauss, Dan L. Duncan, Oil Billionaire, Dies at 77, New York Times (3/30/10).
• David Shulman, The First Multi-Billionaire Death of 2010: The Year Without an Estate Tax Continues, South Florida Estate Planning Law (4/15/10).
• Casey Wooten, Dan Duncan dies at 77, Houston Business Journal (3/29/10).

(Special thanks to Professor Robert G. Nassau for bringing this news to my attention.)

Lobbyists for small businesses change strategy and Congress may simply be "squeezing . . . gold from the goose of wealth transfer tax uncertainty"

In Business Lobbyists Push to Revive Estate Tax They Tried to Kill (BusinessWeek, 3/8/10), Jonathan D. Salant reports that some business groups have shifted strategies in their efforts to lobby against the scheduled return of the federal estate and generation skipping taxes in 2011: 

Lobbyists for small businesses, construction companies, manufacturers and other trade groups are racing the clock to convince Congress to reinstate the federal estate tax they’ve fought for years to abolish.

The National Federation of Independent Business and more than 40 business organizations wrote Senate and House leaders last week asking for quick action on a proposed 35 percent levy on inheritances worth more than $10 million per couple. The Associated General Contractors of America is urging members to contact lawmakers about the plan.

The groups have changed positions in a bid to head off higher taxes on the horizon

Note that some suspect that Congress's delay in acting may be a deliberate effort to extract money from lobbyists.  Prof. Jeffrey Pennell has presciently written,

Congress has trouble meeting even its own deadlines.  Worse, it regards the death tax debate  as a goose that lays golden eggs.  It extracts money from those who want to be heard in the continuing discussion, and persuasive political observers suggest that Congress will not kill the goose by resolving the current uncertainty. . . . 

The point is that [lobbyists] pay in various ways for the right to be heard.  This is the political rent extraction that will continue in 2010 as Congress seeks to motivate well-funded advocates on both sides of the debate. 

Expect Congress to maximize this opportunity to obtain the most benefit from its ongoing failure to resolve these issues.  Some lobbyists and clients may perceive benefit in providing Congress with the spoils.

Most others will benefit from patience, waiting until the politicians stop squeezing maximum gold from the goose of wealth transfer tax uncertainty. 

Wealth Transfer Tax Reform: Don’t Light Your Hair on Fire!, LISI Estate Planning Newsletter # 1568 (December 28, 2009) at http://www.leimbergservices.com/. 

Here is an image inspired by Prof. Pennell's insight:

And here is the "wealth transfer uncertainty formula":

Salant's article indicates that this formula does not apply universally.  But as Prof. Pennell observes, it probably applies to members of Congress.