Future of the Federal Estate Tax

Hints that the federal estate tax might be relegated to a lame duck session

Mark Pazniokas, Lieberman refuses to campaign for Democratic majority, The Connecticut Mirror, Sept. 13, 2010:

Lieberman, who is returning to Washington today after the end of the summer recess, said he expects the immediate focus will be on the leader of the Senate Republican minority, Mitch McConnell of Kentucky.

"That's the interesting drama in our story today and tomorrow, which is what will Senator McConnell do on John Boehner's statement yesterday," Lieberman said. "I think if Sen. McConnell agrees, we can extend most of the tax cuts for at least a year, then leave us to argue about higher income tax cuts and the estate tax in the lame-duck session.

"That would be a significant breakthrough."

Jay Heflin, Kyl: Little progress made on the estate tax, The Hill's On The Money, Sept. 13, 2010:

With less than fours months before the estate tax returns to levels not seen in nearly a decade, Senate Minority Whip Jon Kyl (R-Ariz.) said little progress has been made on the issue. 

"I don't think the Democratic leadership has figured out how to approach the whole tax issue, and that [the estate tax] is a big part of it," he told reporters Monday. "Nobody has talked to me about it, and they know that [Sen. Blanche Lincoln (D-Ark.)] and I are the two that have been pushing reform."

(Hat tip: Kevin Staker, Spokesman for Senate Minority Leader Declines to State Republicans Have Votes to Filibuster Obama Tax Proposal, Estate Tax News Blog by Kevin Staker, Sept. 14, 2010.) 

Recent articles explain that, for the right families, 2010 is an ideal year to transfer wealth to younger generations

[1] No pressing news regarding the federal estate tax.

Although the federal estate tax is being mentioned in many articles, there is no pressing news.  In Nothing to Report (Estate Tax News Blog by Kevin Staker, 8/24/10), Kevin Staker laments about “nothing worthy to report”:

This author searches the Internet several times a day for any news re the estate tax worthy to report. I find it interesting there has been nothing worth reporting since August 4th. Congress being out of session most likely is the cause. 

[2] Focus has shifted to taking advantage of the gift tax.

Journalists are using this break from the estate tax to educate readers about the gift tax opportunity that exists in 2010.  Here are recent articles on the 2010 gift tax opportunity:

[2.1] Joseph A. Giannone, For the rich, 'tis better to give than wait, Reuters, Aug. 18, 2010.

Giannone provides several reasons why 2010 is a good year to gift assets to younger generations: (1) “U.S. taxes [are] almost guaranteed to rise next year,” (2) “[a] weak economy has led to razor-thin interest rates and beaten-down valuations.” 

With regards to taxes rising next year, Giannone elaborates that (1) “capital gains taxes are going t rise,” (2) “top earners may pay nearly 40 percent of their income,” (3) generation-skipping transfer tax rates “are likely to return next year at rates as high as 55 percent,” (4) gift taxes “are set to bounce back to 55 percent next year.” 

Giannone writes, “Contrary to the usual advice, investors should record income and capital gains now, but defer charitable deductions until next year.” 

Giannone suggests various strategies for shifting wealth: (1) intra-family loans, (2) GRATs, (3) charitable lead trusts, and (4) “assets sold into a trust.”

[2.2] Deborah L. Jacobs, Five Ways To Freeze Out Uncle Sam, Forbes.com, Aug. 25, 2010.

Jacobs’s article picks up where Giannone’s article concludes.  Giannone suggests four strategies to transfer wealth to younger generations.  Jacobs elaborates on these strategies in some detail.  She also discusses an additional strategy that is appropriate in our low interest rate, depreciated asset environment: revising existing GRATs.

Jacobs’s article is rich with details, which are presented in plain English.  For example, Jacobs teaches about the AFR and the Sec. 7520 rate, and when each is used. 

(In a previous blog entry, I suggested how Jacobs’s article can empower readers.) 

[2.3] Paul Sullivan, A Year to Give Gifts to Your Heirs, and Save on Taxes, NY Times, Aug. 27, 2010. 

Sullivan provides three reasons that make 2010 “a year to give gifts to your heirs”: (1) low tax rates, (2) “the values of many assets are still depressed,” and (3) no generation-skipping transfer tax in 2010. 

Sullivan outlines some of the risks involved with giving gifts: (1) “certain techniques guaranteed an audit” by the IRS, and (2) psychological effects on those who receive large sums of money without incentives. 

Sullivan concludes with the following advice: “Beating the federal government at the tax game is great, but damaging the lives of your heirs in the process could make it a Pyrrhic victory.”

[2.4] Bucks Editors, Will You Give More Gifts to Your Heirs This Year?, Bucks, Aug. 27, 2010.

This entry summarizes Sullivan’s article.  There are four comments to the entry.  One comment is by Deborah L. Jacobs.  Jacobs’s comment is informative and should be read in conjunction with Sullivan’s article:

Without elaborating, Paul Sullivan notes that making gifts this year to trusts that will benefit grandchildren raises the risk that all the assets will be taxed when they are withdrawn. It's important to note that the same risk applies to gifts to custodial accounts (used for grandchildren who are minors) as well as deposits to 529 savings accounts for their benefit. The problem, in all these cases, is that since there is no generation-skipping transfer tax, and no exemption either right now, it is impossible to apply GST exemption to any of these entities. So the prudent course of action is to only make cash gifts this year to grandchildren who have already reached the age of majority.

[3] What can you do?

[3.1] I recommend printing out the articles above on gifting opportunities and risks in 2010.  These articles are very good.  There is added value in reading them together. 

[3.2] To continue your studies, you can purchase (and maybe give away as a gift) Deborah Jacobs’s book on estate planning, Estate Planning Smarts: A Practical, User-Friendly, Action-Oriented Guide.  Some professors have seen the benefit of an easy-to-understand explanation of estate planning and are assigning the book to their students.  See An uncasebook about estate planning?

Rania Combs: on remaining hopeful for estate tax legislation in 2010

On April 28, 2010, Rania Combs posted Is There Hope for New Estate Tax Legislation in 2010? on Texas Will and Trusts Law Online.  The article asks pressing questions:

• How did we get here?
• Will Congress pass new estate tax legislation in 2010?
• Why is it taking so long?
• Will new estate tax legislation apply retroactively?
• A glimmer of hope?

Combs remains hopeful that Congress will pass something in 2010 and she invites readers to remain hopeful:

Not everyone is convinced that Congress will pass new estate tax laws this year. One blogger recently suggested that Congress intends to do nothing. While that certainly is a possibility, I think it is unlikely in light of the fact there seems to be consensus among politicians on both sides of the political spectrum is that the $1 million exemption is too onerous. . . .

Although there seems to be consensus that the $1 million exemption level is too onerous, members of Congress are arguing about how high the exemption and how low the tax rate should be. . . .

How long will it take? That’s anyone’s guess. Kevin Staker at the Estate Tax News Blog believes that Congress won’t act until after the November election.

Let’s all hope Congress can reach a consensus sooner. But more importantly, let’s hope it can reach a consensus this year.

Federal estate tax reform is reported to be tied to tax cuts for small businesses

On May 4, 2010, two articles reported comments by Senate Finance Committee Chairman Max Baucus on the federal estate tax: 

1. Politico published Baucus moves on biz tax package, by David Rogers. 
2. Jay Heflin posted Baucus sees action on small business bill, estate tax soon in On the Money: The Hill’s Finance & Economy Blog. 

Heflin’s opening sentence encapsulates the news: “Senate Finance Chairman Max Baucus (D-Mont.) on Tuesday said action on a small business tax bill could occur soon and a fix for the estate tax may not be far behind it.”

give-and-take

Heflin reports that “Baucus said talks on the estate tax and the small business bill are happening simultaneously. . . . Staffers said there would likely have to be an agreement on both the estate and small business bill for both measures to advance.”  It is interesting to note that the current talks are not just about the merits of an estate tax and the policies for or against it.  Rather, the estate tax is part of a broader discussion about ways to stimulate small businesses.  One can see the estate tax as a mere bargaining chip that Senators are using to get other reform.  Alternatively, one might argue that the other reform is being offered to reach an agreement on federal estate tax reform.  Either way, these negotiations are an example of the give-and-take that is integral to our political system. 

“encouraging”

In Finally Some Sign of Rousing to Action in the Senate (Estate Tax News Blog), Kevin Staker writes, “It is encouraging that it is reported that Senator Baucus has been consulting with Senator Grassley, the Republican leader of the Committee, and with Rep. Sander Levin, his counterpart in the House.”

choice

Heflin reports that Senator Kyl recently told The Hill that estates might have a choice in complying with the current repeal or the new bill once legislation is enacted.  Giving such might avoid a constitutional challenge to a retroactively imposed estate tax; however, it would be one of the biggest loopholes for the rich that ever existed. 

Speaker Nancy Pelosi mentions possible permanent estate tax relief to highlight tax cuts

In Speaker Pelosi States “Permanent Estate Tax Relief” Is “Making Its Way” (Estate Tax News Blog, 4/15/10), Kevin Staker discusses Speaker Nancy Pelosi's April 14, 2010 press release, Tax Cuts in the 111th Congress. 

The press release refers to H.R. 4154 to highlight forthcoming tax cuts:

All totaled, the Democratic-led 111th Congress has enacted more than $800 billion in tax cuts, with another $285 billion making their way through Congress, such as permanent estate tax relief and the R&D tax credit to spur business innovation. . . .

Learn more about the tax cuts: . . .

PERMANENT ESTATE TAX RELIEF at the 2009 level to ensure that 99.8 percent of estates never pay a dime of taxes and offer certainty and stability for farmers and small businesses. (Passed by House)

On one hand, by stating that $285 billion in tax cuts is “making their way through Congress,” the press release invites optimism.  On the other hand, it is potentially misleading because it looks at estate tax reform through rose-colored glasses.

Lawyer temporarily dedicates blog to federal estate tax

On March 10, 2010, Kevin Staker posted Temporary Change in Blog Name by Kevin Staker on what is now called Estate Tax News Blog by Kevin Staker.  Staker explains:

I am following the news daily regarding the moves, or rather the present lack of action, in Congress and by the President regarding the Estate Tax.  My thought is I will post the news I find, hopefully frequently, to aid anyone who wants to be well informed on the Estate Tax.

After the issue gets resolved, hopefully by the end of the year, I will return this theme of this blog back to estate planning in general, in particular, California estate planning.

Another blog following and reporting about the federal estate tax is great news because readers can have an additional perspective. 

Should the GOP support or oppose the "death tax"?

On March 12, 2010, the FrumForum published two contrasting perspectives: Why the GOP Should Support the Death Tax and Why the GOP Should Oppose the Death Tax. 

These posts are summarized in a March 13, 2010 post on Estate Tax News Blog by Kevin Staker.

The About page of the FrumForm explains that "FrumForum.com is a site edited by David Frum, dedicated to the modernization and renewal of the Republican party and the conservative movement."