Future of the Federal Estate Tax

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."

Laura Saunders (WSJ): it is unclear whether estate tax fix (if any) will be part of income tax compromise

On November 6, 2010, the Wall Street Journal published Four Burning Tax Issues, by Laura Saunders:

Estate Tax

Status: Chaotic. . . .

This is the most difficult outcome to predict, [Clint Stretch of Deloitte Tax] says. It is unclear what a fix would be, if any, and whether it would happen as part of an income-tax compromise. There is sentiment for providing estates of people who died this year a retroactive choice of which tax rules to use.

WSJ: “Too Rich to Live?”-–“Congress . . . is incentivizing death”

On July 10, 2010, the Wall Street Journal published Too Rich to Live?, by Laura Saunders and Mary Pilon. 

[1] Description of a perverse incentive.

The article describes a grim incentive caused by the looming return of the federal estate tax in 2011: 

It has come to this: Congress, quite by accident, is incentivizing death.

When the Senate allowed the estate tax to lapse at the end of last year, it encouraged wealthy people near death's door to stay alive until Jan. 1 so they could spare their heirs a 45% tax hit.

Now the situation has reversed: If Congress doesn't change the law soon—and many experts think it won't—the estate tax will come roaring back in 2011.

[2] Explanation of how we got here. 

Saunders and Pilon explain how we got to this “ugly,” “bizarre,” and “macabre” situation where the wealthy have a “perverse incentive” to “commit suicide”:

So why, with nine years to act, didn't it fix the problem? Political wisdom holds that estate tax changes can't happen in election years for fear of angering voters, and Hurricane Katrina derailed a 2005 opportunity. Late last year, the House of Representatives passed an extension of the 2009 estate tax, but the Senate didn't act.  

Compounding the problem, lawmakers didn't hammer out a fix early this year, as many had expected. Extending the 2009 law retroactive to the beginning of 2010 would have made a seamless transition and resolved issues taxpayers are now facing. Instead, the estate tax has been in limbo all year.

[3] Perspective into the uncertainty that remains. 

Saunders and Pilon provide insight into the uncertainty that remains;

Senators are divided among three possible solutions. Some favor the pre-Bush rate of 55%, while others advocate a 35% rate (with a more generous exemption). A third group prefers the old 45% rate.

Many Washington insiders are betting Congress won't act this year because of an overflowing to-do list, the fall election and fewer than 40 working days left in 2010. At least one near-deal has failed the Senate this year.

Pressure to act will likely grow following the November elections, when Congress is expected to address many other expiring Bush-era tax breaks, including income taxes and capital-gains rates.

[4] Notable deaths in 2010.

Saunders and Pilon list a number of notable people who died in 2010:

• Louis Auchincloss – author
• Glen Bell – Taco Bell founder
• Dennis Hopper – actor
• Art Linkletter – T.V. host
• J. D. Salinger – author
• Walter Shorenstein – real estate developer

(I provided hyperlinks to Wikipedia articles.)  Saunders and Pilon explain that these notables have “possibly [left] behind tax-free estates for their heirs. Had they died next year, the result could have been far different.”

[5] Words for unusual circumstances. 

This article uses striking words to describe the circumstances created by the repeal of the federal estate tax in 2010 and its scheduled return in 2011:

• “The math is ugly”
• “bizarre menu of options for wealthy older people
• “Estate planning was never cheerful, but now it is getting downright macabre, at least for the tax averse.”
• “Advisers say the estate-tax dilemma is especially awkward for heirs.”
• “Meanwhile, the living and their relatives face a complex calculus with unknown variables.”

In a WSJ article, Laura Saunders reports on introduction of S.3533

On June 25, 2010, the Wall Street Journal published, Sanders Estate-Tax Proposal Would Hit Wealthy Harder, by Laura Saunders.  Here are a few highlights:

The changes would be retroactive to Jan. 1 of this year.

"The Sanders proposal is one extreme in the current debate," said Clint Stretch, an analyst at Deloitte Tax. "The challenge for the Senate is whether the members can agree to anything at all." . . .

Iowa Sen. Charles Grassley, the highest-ranking Republican on the Senate Finance Committee, said "I welcome the other side's finally putting a proposal on the table."

WSJ: estate tax repeal could raise taxes for some

The opening lines of a February 13, 2010 Wall Street Journal article, Why No Estate Tax Could Be a Killer, by Laura Saunders, capture the point:

Congress shocked everyone by letting the estate tax lapse on Jan. 1.

Now, here is the real stunner: For many, the lapse actually will raise taxes.

The following image visually displays how repeal can cost some people more in taxes:

Saunders has written another very interesting article and I am sure many of us will be discussing it.  For example, in Estate Tax Repeal Good For The Rich, Bad For the Middle Class (Hahn’s Estate Planning Blog, 2/12/10), Joseph Hahn writes, “As many of us suspected, the capital gains issue will impact many, many more households than the estate tax ever did.”

Video: Laura Saunders on the federal estate tax

Laura Saunders (of the Wall Street Journal) talks about the estate tax in this video.

We have seen a number of good articles by Laura Saunders on the federal estate tax, so it is a true delight to see and hear her.  (See here for my blog entries that mention Laura Saunders.)

This video was also blogged about in the Personal Finance Chronicle blog, here.

A little humor: Monty Python, "Bring out your dead!"

A blog entry by Prof. Alex Tabarrok  -- Keep Momma on the Train! -- on Marginal Revolution comments about the recent Wall Street Journal article by Laura Saunders.  (See here for my comments on Saunders' article). 

Tabarrok links readers to a Monty Python clip, "Bring out your dead!"  This clip is humorous because it evokes throwing momma off the train:

It should be noted that much uncertainty surrounds whether Congress will make an estate tax retroactive to January 1, 2010, so as one writer recently states, "you might want [your loved ones] to linger at least partway through [2010] to see what Congress does." 

For more humor regarding the federal estate tax, see the blog entry I reference in Humorous post on Huffington Post regarding the federal estate tax.

WSJ article -- Rich Cling to Life to Beat Tax Man -- has a mistake (updated)

On December 30, 2009, the Wall Street Journal published Rich Cling to Life to Beat Tax Man, by Laura Saunders.  I blogged about a few excellent quotes from this article, here.

In a post on TaxProf, Mistake in Today's WSJ Front-Page Estate Tax Article (12/30/09), Prof. Paul L. Caron alerts us to a mistake in the article:

The otherwise excellent article contains this serious misstatement of the law:

[E]state planning in 2010 will be complicated by a new twist: a complex tax on capital gains, levied at death, that will affect a broader swath of taxpayers.

Of course, there is no Canadian-style capital gains tax at death.  Instead, during the period of estate tax repeal (if the estate tax is not retroactively reinstated), the heirs will take a carryover basis in any inherited property, with any capital gains tax deferred until the property is sold by the heirs.  (Hat Tip: Scott Meyer.)  

The Wall Street Journal recognized the mistake in this article in Corrections & Amplifications (12/31/09):

Estate planning in 2010 will be complicated by a capital-gains tax that replaces the estate tax. A Wednesday front-page article about a temporary lapse in the estate tax incorrectly stated that the gains tax would be levied at death.

(Updated: 12/31/09)

WSJ: "congressional malpractice" leads rich to cling to life to beat tax man

On December 30, 2009, the Wall Street Journal published Rich Cling to Life to Beat Tax Man, by Laura Saunders.  Saunders has done an excellent job interviewing practitioners and experts.  Below, I provide my favorite quotes from the article.

One interesting quote from Joshua Rubenstein shows the difficult decisions some families are now facing:

"I have two clients on life support, and the families are struggling with whether to continue heroic measures for a few more days," says Joshua Rubenstein, a lawyer with Katten Muchin Rosenman LLP in New York. "Do they want to live for the rest of their lives having made serious medical decisions based on estate-tax law?"

A quote from Andrew Katzenstein provides a practice tip with regards to drafting health-care proxies:

To make it easier on their heirs, some clients are putting provisions into their health-care proxies allowing whoever makes end-of-life medical decisions to consider changes in estate-tax law. "We have done this at least a dozen times, and have gotten more calls recently," says Andrew Katzenstein, a lawyer with Proskauer Rose LLP in Los Angeles.

Katzenstein shares with Saunders that one infirm client is even considering euthanasia as an estate planning technique:

The situation is causing at least one person to add the prospect of euthanasia to his estate-planning mix, according to Mr. Katzenstein of Proskauer Rose. An elderly, infirm client of his recently asked whether undergoing euthanasia next year in Holland, where it's legal, might allow his estate to dodge the tax.

His answer: Yes.

In another interesting quote, Professor Michael Graetz calls the lapse in the federal estate tax "congressional malpractice":

Now, all bets are off. "If Congress couldn't do it this year, why will they be able to do it next year?" says Prof. Michael Graetz of Columbia University, who worked both at Treasury and for Congress. He calls the lapse "congressional malpractice."

Saunders also discusses the uncertainty that remains in whether Congress will apply an estate tax retroactive to January 1st, and the possibility of a challenge to such a retroactive tax.

A few recent posts and articles on the federal estate tax

Below are a few of the many recent posts and articles on the federal estate tax:

• Professor Paul Caron, The Constitutionality of a Retroactive Reenactment of the Estate Tax in 2010, TaxProf (12/17/09).  This post is a must-read regarding the retroactive tax problem.  See Ashby Jones's coverage of Prof. Caron's post below.
• Professor Paul Caron, CBO Releases Estate & Gift Tax Data, TaxProf (12/18/09). 
• Kevin McCormally's Tax Tips-Estate Taxes, Nightly Business Report (12/18/09) has an interview with Kiplinger's Kevin McCormally.  McCormally calls the carryover basis rule in 2010 "a crazy idea."  In an earlier post, I blogged about McCormally's recent article.
• Eva Rosenberg, Beating the estate tax to death, MarketWatch (12/18/09).
• Ashby Jones, On Congress, the Estate Tax and the Constitution, Wall Street Journal Law Blog (12/18/09) (examining the retroactivity problems).
• Laura Saunders, Uncertainty Swirls Around the Estate Tax, Wall Street Journal (12/19/09).