Future of the Federal Estate Tax

Rep. Rangel and Sen. Baucus on retroactively imposing the federal estate tax

In a January 14, 2010 Wall Street Journal article, Martin Vaughan reported that Rep. Charles Rangel (D., N.Y.) is "unsure whether there will be legislation to re-impose the federal estate tax retroactive to Jan. 1." 

Vaughan also reported that "Sen. Max Baucus (D., Mont.), chairman of the Finance Committee, has said he wants a retroactive law that will ensure the estate tax remains in effect throughout 2010."

The article closes with the following:

"Sen. Baucus is in contact with Chairman Rangel and continues to work with Sen. Grassley to develop a viable, fiscally-responsible proposal that provides a seamless fix with the fewest disruptions and administrative problems," a spokesman for Baucus said. The spokesman was referring to Sen. Charles Grassley (R., Iowa), the senior Republican on the Finance Committee.

"His goal remains addressing it quickly and in the most complete and permanent way possible that is fair to American taxpayers," the spokesman said of Baucus.

Quickly?  Completely?  Permanently?  Fairly?  These words might evoke noble ideals, but our experience gives them the hollow ring of mere rhetoric. 

For farmers and ranchers, a repealed estate tax may not bring relief

The post titled Federal Estate Tax in Limbo for 2010 on the OSU Extension Farm Succession Blog provides at least three reasons why the repeal of the federal estate tax might not provide relief for farmers (and ranchers) in 2010:

1. Limited step-up in basis.  "[T]here will be only a limited step-up in basis."  The following reminder from the post is important: "As a reminder, tax liability due to capital gain is not triggered until sale of the appreciated asset."
2. Record keeping nightmare.  "The Executor will be able to add this extra basis to the existing basis of the property.  This means that Executors or heirs will have the added complexity of determining the prior basis of the property, which might go back many years or even generations."
3. Uncertainty from retroactivity.  "It appears the full repeal of the federal estate tax in 2010 may be very short lived in 2010.  Senate Finance Chairman Max Baucus, D-Mont., and House Ways and Means Chairman Charles Rangel, D-N.Y., have said they will try to repeal the repeal and get the federal estate tax reinstated retroactively for 2010 after the New Year.  This will cause confusion, uncertainty and possibly very large tax headaches for those families who have someone pass between Jan 1, 2010 and whenever Congress reaches a compromise."

The Senate will probably pass a temporary federal estate tax extension

Ryan J. Donmoyer has written an excellent article, Senate’s Baucus Seeks Temporary Estate-Tax Extension (Update2) (12/15/09), for Bloomberg.  In this article, we learn that the Senate will probably pass a mere extension to the federal estate tax: 

The U.S. Congress is moving toward a stopgap measure to prevent the federal estate tax from expiring Dec. 31, postponing a broader fight on how much the government can get from the fortunes of multimillionaires when they die.

Representative Charles Rangel said today House members are drafting legislation to extend the current law for two months, retaining a top rate of 45 percent on estates valued at more than $7 million per couple. The tax now yields about $25 billion in revenue annually.

“Anything to make certain that it just doesn’t expire,” said Rangel, a New York Democrat and chairman of the House Ways and Means Committee. . . .

Chairman Max Baucus last night said he would seek to attach a temporary extension to some other legislation before Congress recesses this month, possibly a defense spending bill.

“There’ll be an extension, one-year, two-year. We don’t know,” said Baucus, a Montana Democrat.

Donmoyer provides other relevant information, background information, and highlights of opposition and support for the federal estate tax.

Jensen explores the possibility that estate tax reform might bypass the House Ways and Means Committee

In Tax Breaks Heading House Floor -- an excellent post on Derek's Tax Blog --Derek W. Jensen (attorney, Seattle) informs that Rep. Charles Rangel [D-NY] "intends to introduce legislation in December directly to the floor of the house that would keep a variety of tax breaks from expiring before the end of the year instead of having it go through the House Ways and Means Committee which he Chairs."

Jensen then asks and answers the difficult question on our minds, "Will this bill include an extension of the current estate tax exemptions into next year? Maybe, but it is undecided."

So, despite the clamor and the news this week, we begin the weekend exactly where we have been the past few years -- anticipating a coming change and befuddled by the lack of clarity from our lawmakers.  

For more on Rep. Rangel's plans to renew expiring tax breaks, see

• Bloomberg
• WebCPA

The federal estate tax rate will probably remain at 45%

There are two ways to reduce the federal estate tax rate:

1. an outright reduction -- e.g., from 45% to 35%, or
2. a gradual reduction -- e.g., H.R. 3905 (summarized here)

On November 13, 2009 Martin Vaughan reported that there is a group of bipartisan senators that supports reducing the federal estate tax rate.  US Senate Centrists Ponder Gradual Estate Tax Reduction, Dow Jones Newswires.

This bipartisan group, which is led by Sen. Jon Kyl [R-AZ] and Sen. Blanche Lincoln [D-AR], is "studying a proposal to gradually reduce the tax until it reaches 35% in 2019."  Vaughan reports that this group is staking its hopes on a gradual reduction of the estate tax because of "congressional pay-as-you-go budgeting rules and a crowded Senate schedule."

But Vaughan suggests that even the second option of a gradual reduction is not likely:

Working against proponents of lowering the estate tax is the fact that the Senate is almost exclusively focused on health-care legislation, with very little Senate floor time available for much of anything else through the end of this year.

In fact, Vaughan informs that the federal estate tax rate will probably remain at 45%:

House Ways and Means Chairman Charles Rangel (D., N.Y.) favors extending the 2009 estate tax policy permanently. The House is likely to pass within the next few weeks legislation that either permanently extends 2009 law, or does so for one year only.

Vaughan's article is also reported here: TaxProf Blog

(Updated 11/14/09)