Future of the Federal Estate Tax

Insight into Obama-Republican deal and the estate tax

On December 6, 2010, President Obama announced that he reached a tentative deal with republicans to extend the Bush Tax Cuts and reform the federal estate tax.

The writers and bloggers at Forbes.com have been covering the issue from many angles.  Featured on the Forbes.com webpage are two of my recent blog posts:

There are a number of other blog posts to mention, including:

• Brian Wingfield, How The Tax Compromise Might Affect Estate Planning, Business in the Beltway.
• Hani Sarji, Obama-Republican Estate Tax Deal Draws Criticism: “The Deal Is Unacceptable”, Estate of Confusion.
• Janet Novack, Washington's New M.A.D. Doctrine: Mutually Assured Deficits, Taxing Matters.
• Hani Sarji, Obama Announces Estate Tax Deal With Republicans: 35% Tax Rate And $5 Million Exemption, For Two Years, Estate of Confusion.
• Brian Wingfield, Taxes? Hold 'Em!, Business in the Beltway.
• Brian Wingfield, Statement By The President On Tax Cuts and Unemployment Benefits, Business in the Beltway.

For other coverage of the Obama deal, see Paul Caron, More on the Obama-Republican Tax Cut Deal, TaxProf Blog, Dec. 8, 2010.

Also, Forbes.com writers and bloggers have covered the recently introduced and defeated Baucus proposal:

• Hani Sarji, With Baucus Bill Blocked In Senate, What Now For Estate Tax?, Estate of Confusion.
• Ashlea Ebeling, Estate And Gift Tax Bombshell, The Best Revenge.

(Also note that like other Forbes.com bloggers, I am grabbing the headlines for many of the articles that I am reading.  One of the readers of Estate of Confusion told me that he finds My Headlines Grabs very helpful.  Let me know what you think: http://blogs.forbes.com/hanisarji/headline-grabs/)

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."

Josh Kosman (NY Post): Sen. Baucus might introduce a bill that would reduce the estate tax

On September 22, 2010, the NY Post published Middle, class, estate tax cuts on tap in Senate, by Josh Kosman:

Sen. Max Baucus, chairman of the Senate Finance Committee, may introduce a bill as early as today that would include a permanent middle-class tax cut and a reduction in estate taxes, The Post has learned. . . .

Baucus, a Democrat from Montana, is hoping that including the estate tax provision will garner a few votes from Republicans or more conservative Democrats.

Senators could not agree to gradually reduce the federal estate tax rate to 35% and raise the exemption to $5 million

The news.

A number of articles have reported that Senators have reached no agreement on the federal estate tax. 

In Kyl: Senate deal off on estate tax (On the Money: The Hill’s Finance & Economy Blog, 5/18/10), Vicki Needham reports the following:

Senate Minority Whip Jon Kyl (R-Ariz.) said the accord, which was all but forged a week ago, began to dissolve Monday night and broke down Tuesday after talks between leaders in both parties.

After talks with Senate Finance Chairman Max Baucus (D-Mont.) and Senate Minority Leader Mitch McConnell (R-Ky.), they scrapped a plan to move forward with the tax that expired at the end of 2009.

In US Senate Effort to Reduce Estate Tax Hits Turbulence (Dow Jones Newswires, 5/18/10), Martin Vaughan reports:

[I]n a closed-door meeting of Senate Democrats Tuesday, several senators denounced the plan in strong terms, according to those present. They argued that with problem budget deficits and with many Americans still out of work, it is the wrong time to cut taxes on the richest Americans.

In their own words.

Here are few quotes from senators:

• Senate Minority Whip Jon Kyle [R-AZ]:
  • “Nothing is clear about how the estate tax will be considered.” (Source: Martin Vaughan, US Senate Effort to Reduce Estate Tax Hits Turbulence)
  • “We no longer have an agreement because the Democratic side has decided that unless a matter has a guaranteed majority of Democratic votes going in, they’re not going to allow it on the floor, at least not voluntarily. . . . So we have to find a way to get a reasonable permanent estate tax reform to the floor where members can vote on it.”  (Source: Vicki Needham, Kyl: Senate deal off on estate tax.) (You can hear Sen. Kyle speak the first sentence at Republican Kyl Says Democrats Are Blocking His Estate Tax Amendment, Talk Radio News Service, May 18, 2010.)
• Senate Finance Committee Chairman Max Baucus [D-MT]: “There’s no agreement on estate tax, neither on substance nor on process.  None whatsoever.”  (Source: Martin Vaughan, US Senate Effort to Reduce Estate Tax Hits Turbulence.)
• Senator Robert P. Casey, Jr. [D-PA]: “The idea that we’re going to give an incredible economic advantage to less than 1 percent of our taxpaying population is really offensive to me. . . . Most of our caucus is very concerned with what would happen on the estate tax.” (Source: Sam Goldfarb, No Deal Yet on Estate Tax, Baucus Says, Tax Notes Today, May 18, 2010, 2010 TNT 96-5.)
• Senator Bernard Sanders [D-VT]: “The idea that we would make significant exemptions within the estate tax to give more tax breaks to the top three-tenths of 1% is nauseating.  I will do everything I can to stop that.”  (Source: Martin Vaughan, US Senate Effort to Reduce Estate Tax Hits Turbulence.)

Notes on the proposed deal.

Although the details of the proposed deal have not been disclosed, here are some notes, which are compiled from various news articles:

• Tax cuts. Tax cuts would be phased-in over ten years: the rate would go down 35% and the exemption up to $5 million, indexed for inflation.  (Martin Vaughan, US Senate Effort to Reduce Estate Tax Hits Turbulence.)
• Prepaying the estate tax.There have been talks about giving individuals the option of prepaying the estate tax through pre-paid trusts.  Individuals who pre-pay would benefit from a lower rate.  (Id.)
• Budget offsets.  Lawmakers were searching for budget offsets within the estate tax.  The offsets would (1) help to prevent a higher deficit, and (2) prevent “dipping into other revenue streams” (Meg Shreve, Lobbyists Say Lawmakers Looking for $60 Billion in Offsets for Estate Tax Bill, Tax Notes Today, May 17, 2010, 2010 TNT 94-4). 
• No credit for state estate taxes.  The federal tax credit for state estate taxes would continue to be repealed.
• Limits on GRATs.  Limits on the use of GRATs were being considered.   
• Pay-as-you-go.  The proposal could comply with pay-as-you-go rules.  “Budgeting rules dictate that the 2009 estate tax levels can be extended for two years without revenue offsets, but additional revenue loss must be offset.  Senators can waive the offset rule, however, with a 60-vote supermajority.”  (Eric Kroh, Kyl Says Agreement Reached on Some Estate Tax Details, Tax Notes Today, May 18, 2010, 2010 TNT 95-2.) 

A number of issues were not clarified in the articles that I read:

• the gift tax rate and exemption
• whether any changes would be retroactive 

Also, there is no indication that portability of the exemption amount between spouses was discussed.

Status of the reform.

Estate tax uncertainty continues.  Reform is hampered by a deep divide between democrats and republicans:  

• House.  As indicated in the voting for H.R. 4154, most Democrats in the House supported a permanent estate tax with an exemption of $3.5 million and a tax rate of 45%.  Republicans in the House did not.
• Senate. As the current talks indicate, some Republicans (and some Democrats) would support a lower estate tax rate (down to 35%) and a higher exemption (up to $5 million).  Yet some Democrats vehemently oppose such a tax reduction.  At least one Democrat in the Senate finds the idea “nauseating.”

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. 

Last week, BNA reported on progress of estate tax reform in the Senate

On January 22, 2010, an article by Brett Ferguson in BNA's Daily Tax Report -- Baucus Says No Senate Action Pending on Estate Tax Legislation (13 DTR G-5) -- provided relevant information regarding the progress of estate tax reform in the Senate:

Senate Finance Committee Chairman Max Baucus (D-Mont.) told BNA Jan. 21 that he expects to draft estate tax legislation that will reimpose the estate tax retroactively to the start of 2010, but that there is no action pending in the Senate, and timing remains uncertain. . . .

Although Baucus said in December that he regretted that the Senate was unable to pass an estate tax extension prior to its expiration and planned to bring the tax up “as soon as possible,” the chairman said it is not clear yet when the Senate will be able to bring a bill to the floor. . . .

[H.R. 4154] was placed on the Senate calendar Jan. 20, but that does not mean action is imminent.

Baucus said it is possible that the estate tax legislation in the Senate will be attached to a larger bill, but that he did not want to speculate on what the vehicle would be.

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."

WSJ, "the biggest debacle is the estate tax"

On January 7, 2010, the Wall Street Journal published an opinion by Stephen Moore, The New Year Brings Tax Chaos:At least 2010 is a good year to die. 

Moore writes about the taxes that expired at the close of 2009.  Here is what he had to say regarding the repeal of the federal estate tax:

But the biggest debacle is the estate tax. On Jan. 1 it fell to zero for the year, and then in 2011 it goes back up to 55%. Estate tax attorneys are full of stories of wealthy heirs with living wills that ask their dependents to take account of the estate tax when determining when to pull the plug on the life support system. Don't be surprised if death rates of wealthy Americans rises substantially this year.

Sen. Max Baucus has vowed to raise the estate tax back to between 35% and 55% this year, and to make that change retroactive to Jan. 1. But this will be of questionable constitutionality. Can Congress impose a new estate tax, say in April, on someone who was already dead and buried in February? Let's hope not.

He closes his article by pointing out a discrepancy between the way Congress acts and the way it wants people to act:

Congress's failure to settle the tax laws for 2010 is an unforgivable dereliction of duty. The federal government isn't so understanding when American citizens are late paying their taxes: The IRS imposes strict civil fines and even criminal penalties. We should hold Congress to the same standards.

For a similar notion, see WSJ: "congressional malpractice" leads rich to cling to life to beat tax man (12/29/09).

Bob Williams, "you might want to linger at least partway through the year to see what Congress does"

In Estate Tax Whiplash (12/18/09), Bob Williams (Senior Fellow, Tax Policy Center) explored the uncertain estate tax consequences of dying in 2010:

So, come the New Year, rich folks will have a twelve-month window in which to die tax-free. As Representative Richard E. Neal (D-MA) put it, “If you are at the checkout counter, you might want to expedite things.” . . .

And you might want to wait a while in 2010. Before you (or your greedy heirs) hasten your departure from this “mortal coil,” note that Senate Finance Committee Chair Max Baucus (D-MT) has promised to revive the issue next month and to reimpose the tax retroactive to January 1. I have no idea whether such legislation could survive expected cries of “Foul!” and the accompanying lawsuits, but you might want to linger at least partway through the year to see what Congress does.