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."

Tom Herman (WSJ): "Nobody knows what will happen [to the estate tax] . . . But there is a compelling reason to expect some action"

Tom Herman answers the pressing question: What Will Happen to the Federal Estate Tax? (Wall Street Journal, 11/7/2010).  Here is part of his answer: 

Q: In reading about what will happen to the Bush tax cuts in 2011, the federal estate tax is never mentioned, in my experience. Why so, and what should we expect?

—N.M., Santa Cruz, Calif.

A: The strange saga of the federal estate tax, dubbed the "death tax" by its foes, has drawn growing attention lately. Nobody knows what will happen -- even though the midterm elections now are history. But there is a chance that Congress finally will take action in coming weeks when lawmakers return for a lame-duck session.

Naturally, you can't rule out the possibility that Congress will do nothing. Gridlock seems like Washington's natural state these days. But there is a compelling reason to expect some action: If Congress does nothing, the nation will face a bizarre set of circumstances.

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.

Anne Tergesen (WSJ): gift tax and GST tax opportunities in 2010

On October 30, 2010, the Wall Street Journal published Last Chance to Foil a Gift Tax, by Anne Tergesen.  This article is excellent, but its title does not reflect the great insight that the article provides on the GST tax. 

For the right people, there are excellent estate planning opportunities in 2010:

When the GST tax returns on Jan. 1, the Internal Revenue Service will allow each grandparent to shield a total of about $1.34 million, according to JPMorgan Private Bank. Advisers are urging families with a desire to give more to take action by Dec. 31. "We're having a lot of conversations about the fact that there's no GST tax this year," says Elizabeth Schurig, a partner at Schurig Jetel Beckett Tackett in Austin, Texas.

Ms. Schurig is urging one client to give each of her 12 grandchildren up to $2 million by year end. This, she says, would "reduce the grandparent's estate, and it has no GST tax implications"—and any future appreciation on the assets would occur outside the estate.

The move would require the woman to write a big check to the IRS, of course. The reason: A gift of that magnitude would trigger the gift tax, which is currently 35% but is set to rise to 55% in 2011.

John D. McKinnon (WSJ): "Estate-Tax Rises Again as Issue on Trail"

On October 14, 2010, the Wall Street Journal published Estate-Tax Rises Again as Issue on Trail, by John McKinnon. McKinnon reports that "a move to end the estate-tax is luring new adherents in the 2010 midterm campaign, turning permanent repeal into a negotiating stance for future congressional wrangling over taxes."

Reasons why the estate tax has become a hot issue on the campaign trail include:

• tax rates are scheduled to rise in 2011
• it affects small businesses an family farms
• it is an emotional issue

McKinnon informs,

For now, it appears unlikely the momentum behind repeal will prompt Congress to extend the repeal for 2011. Instead, the current Democratic-controlled Congress seems likely to consider a new version of the estate tax in a lame-duck session after the November election as part of a package of extensions of other expiring Bush-era tax breaks.

A strong showing for repeal in November, however, could raise pressure on lawmakers to lower rates and increase exemptions, Republican aides say. It could also lay the groundwork for reconsideration of the issue following the 2012 election.

McKinnon discusses how the estate tax is impacting specific campaigns.

McKinnon discusses the news in this interview:

 

Arden Dale (WSJ): "Treasury Works On Clearing Up Estate-Tax Questions"

On October 1, 2010, the Wall Street Journal published Treasury Works On Clearing Up Estate-Tax Questions, by Arden Dale:

The U.S. Treasury is working on helping out taxpayers and their attorneys mired in troubles from the one-year gap in the federal estate tax. A main problem affects how much capital gains people will owe.

On Friday, the agency confirmed a report that it is working on how to value assets in an estate to determine capital gains, plus other matters. Congress, in letting the estate tax repeal stand for 2010, left numerous questions unanswered.

Treasury spokesperson Sandra Salstrom said the agency is working on "guidance that may be necessary, depending on how the estate tax is ultimately addressed," and confirmed that Catherine Hughes, an attorney-adviser in the agency's Office of Tax Legislative Counsel said officials know direction is needed urgently.

Mark Maremont and Leslie Scism (WSJ): "Shift to Wealthier Clientele Puts Life Insurers in a Bind"

On October 3, 2010, the Wall Street Journal published Shift to Wealthier Clientele Puts Life Insurers in a Bind, by Mark Maremont and Leslie Scism.  This article is interesting because it shows that “a growing proportion of the tax benefits of life insurance goes to the well-off, not to the middle class that once was the industry's backbone.”  Among other things, the article highlights the role of life insurance in estate planning for wealthy individuals:

in a development all but unnoticed outside the industry, life-insurance companies gradually have shifted away from their broad historical base of middle-class households. Instead, statistics show, an increasing portion of insurers' business consists of selling large policies to wealthier Americans, often as part of complex estate-tax plans. . . .

Many large policies are part of estate planning. In one method, the insured sets up an irrevocable trust to buy a life-insurance policy and pays the premiums by giving sums of money to the trust annually.

This can lower estate taxes, because the trust isn't considered part of the estate, and the payment of premiums reduces the estate's size. Then, to the extent estate taxes are due, the insurance proceeds can help cover them.

The article provides quotes from those who are sympathetic to having tax-advantaged life insurance for the wealthy.  These supporters use similar arguments to those used to support a reduced (or eliminated) estate tax:

• the tax breaks “encourage wealth accumulation that helps feed capital formation and job creation”
• the tax breaks help those who save and accumulate their wealth

Significantly, the article points out that “[t]here is no proposal in Congress this year to curb the tax breaks for life insurance.”  Two reasons are (1) there would be “heavy opposition from insurers and agents,” and (2) higher taxes are not popular when the economy weak.

Round-up of comments on the WSJ op-ed by Rubin and Robertson

On September 1, 2010, the Wall Street Journal published Bring Back the Estate Tax Now, an op-ed by Robert Rubin (U.S. Treasury Secretary 1995-99 under President Bill Clinton, formerly at Goldman Sachs and Citigroup, currently at the Council on Foreign Relations) and Julian Robertson (founder Tiger Management hedge funds, now a private investor, philanthropist, founder of Robertson Foundation).  This op-ed continues the arguments that Rubin and Robertson made for a stronger estate tax in a July 21, 2010 United for a Fair Economy teleconference.  See UFE teleconference called on Congress to reinstate the federal estate tax, Future of the Federal Estate Tax, July 21, 2010.

In the WSJ op-ed, Rubin and Robertson urged Congress to take immediate action by reinstating the federal estate tax with an exemption of $3.5 million and a tax rate of 45%, retroactive to January 1, 2010: 

We would recommend continuing 2009's regime . . . Small businesses and family farms can be protected both through the exemption . . . and through special deferred payment rules.

We both believe that the estate tax should be a component of any federal tax system. . . .

An estate tax can provide revenue—with little, if any, adverse supply-side economic impact—to fund deficit reduction, additional public investment or added assistance to those affected by the economic crisis. . . .

We also share the view that the estate tax is grounded in powerful philosophical underpinnings. . . .

[Rubin and Robertson argue that the estate tax should be retroactively imposed to January 1, 2010 because “in the case of the estate tax, presumably nobody's demise was affected in timing by the structuring of our tax laws.  And importantly there has been notice—through the president's budget and statements by public officials—that a tax would be enacted earlier this year that would apply to the whole of this year.”]

[A]ction on the estate tax should not wait. Our country is losing revenue that, with its stressed fiscal conditions, it can ill afford to forego.

This article provoked many comments.  Here are a few: 

[1] Ira Stoll, Rubin and Robertson on Estate Tax, The Future of Capitalism, Sept. 1, 2010.  Stoll criticizes Rubin and Robertson’s claims: 

Preserving vitality and dynamism in America is a worthy goal. But there are lots of ways to do it — immigration, education reform, lower taxes and less regulation come to mind. It's not clear that taking assets away from people who die and giving the assets to politicians to dispense is the big boost to vitality and dynamism that Mr. Rubin and Mr. Robertson claim it is.

[2] Jonathan Berr, Don’t Believe The Nonsense About The Estate Tax, 24/7 Wall St, Sept. 1, 2010:

Getting rid of it entirely seems unwise, especially given the more than $1 trillion federal deficit.  Under the 2009 rules,  which Robertson and Rubin back, people with estates worth $3.5 million or couples with holdings valued at $7 million are exempt from the tax.  Very few — only about 1 of every 400 of the wealthiest estates — paid any estate tax under the 2009 rules which have a 45 percent rate.  This seem reasonable, particularly since there are protections for small businesses and farmers.

Letting rich people inherit money without restrictions rewards people who don’t need the help and hurts most people who have to pay higher taxes than they would otherwise.

[3] Felix Salmon, When plutocrats call for higher taxes, Reuters blog, Sept. 1, 2010:

It’s ludicrous that the estate tax is at zero this year. But it’s not going to be easy to pass a retroactive tax, especially when its biggest cheerleaders are these two guys: the person most to blame for the global financial crisis, and a hedge-fund billionaire who carefully skirts residency requirements to avoid paying millions of dollars in taxes.

[4] Charles Rowley, Robert Rubin, Prince of Darkness, strikes again, Charles Rowley's Blog, Sept. 1, 2010. 

Maybe this is not such a bad idea Mr. Rubin! I am not exactly a public official, but I am a professor, which, squeezing a notch or two, might give me the kind of standing that you require. So I now pronounce that it is my desire to impose a retrospective wealth tax of 100 percent only on individuals who have ever been referred to as The Prince of Darkness.  At the same time, any person with such a connotation, should they become bankrupt, should serve time in a Debtors’ Prison, prior to being exiled to Somalia.

Does that sound good to you Mr. Rubin?  Or do you now think that the Founders had some sensible ideas after all?

[5] Ira Stoll, More on Robertson, Rubin, and the Estate, The Future of Capitalism, Sept. 3, 2010.  This post summarizes “reader-participant-community member-content co-creator-watchdogs” and continues to criticize Rubin and Robertson’s arguments. 

[6] Deborah L. Jacobs (in a comment), Retroactive tax - Reader comments, The Future of Capitalism, Sept. 3, 2010.  Jacobs, the author of Estate Planning Smarts: A Practical, User-Friendly, Action-Oriented Guide (DJWorking Unlimited, 2009), posted a comment to Stoll’s previous post.  In part, Jacob writes, 

I agree with Robert Rubin and Julian Robertson ("Bring Back the Estate Tax Now," Wall Street Journal, Sept. 1, 2010) that the estate tax should be restored retroactively at the levels that were in effect in 2009. At those levels the tax affects very few people. And past court cases suggest that restoring it retroactively is perfectly legal.

But Congress also needs to address an issue that Rubin and Robertson don't cover in their op-ed piece: Some people with a lot at stake have argued that a retroactive tax is unconstitutional and have threatened lawsuits.

[7] Thomas Lifson, Liberal hypocrites on the estate tax, American Thinker, Sept. 3, 2010.  Lifson writes, “Do not read [Stoll’s 9/3/10 post] unless you enjoy laughing at rich liberals looking like craven hypocrites.”  Lifson’s very short post generated a number of comments.  Many of the comments disparage liberals.  

One comment, posted by Bubba's BBQ, makes a point that is too often missed – many of the wealthy who are arguing for a stronger estate tax have wealth protected in long-lived dynasty trusts: “OK - Let's bring back the death tax. But while we are at it, Let's put a 60% one time tax on all active trusts, dating back to 1800. or a 33% annual tax on the same active trusts. Then stand back and watch them howl.”

[8] Kate Obenshain, Liberal Solution to the Financial Crisis: Death Tax, Human Events, Sept. 15, 2010: “The liberals’ have floated their latest solution to the financial crisis and its success is guaranteed to be equal to that of the stimulus. Bring back the death tax, as unveiled by the liberal mastermind, Robert Rubin in the Wall Street Journal.”

[9] CNBC - Simon Rosenberg v. Kate Obenshain:

[10] John Tamny, The Estate Tax Is A Tax On Those Without Estates, Forbes.com, Sept. 20, 2010.  Tamny argues that the estate tax hurts inventors and innovators because it reduces the amount of money available to fund projects: 

The one-year disappearance of the estate tax in 2010 has unsurprisingly generated a great deal of commentary about how accumulated wealth should be taxed going forward. Former Goldman Sachs head Robert Rubin recently joined with hedge fund eminence Julian Robertson to ask for the quick reinstatement of what some term the "death tax."

If they get their way, the losers in this scenario will be those without any estates to tax. . . .

And with savings in mind, it can't be stressed enough that an estate tax is very much a tax on those not in possession of inherited wealth. When governments tax wealth whether it's earned or inherited, what they're really doing is reducing the amount of capital available to fund the growth of tomorrow's innovators. Estate taxes, far from impacting the economy the least as Rubin and Robertson suggest, impact it very negatively for reducing the amount of capital the non-rich can access on the way to greater wealth.

* * *

Observation: an argument for a $3.5 million exemption and a rate of 45% is now widely considered to be a “liberal” position.  Would it be seen as “liberal” if the estate tax returns in 2011 with an exemption of $1 million and a rate of 55%?  

(Special thanks to Paul Caron who reported on the original WSJ op-ed and aggregated subsequent articles.  See Rubin & Robertson: Bring Back the Estate Tax, Retroactive to Jan. 1, TaxProf Blog, Sept. 1, 2010; More on Rubin & Robertson, Bring Back the Estate Tax, Retroactive to Jan. 1, TaxProf Blog, Sept. 4, 2010; also, special thanks to Michael Hepner, a benefits professional, who first alerted me to the WSJ op-ed.)

Martin Vaughan (WSJ): "Estate Tax Choice May Be In Works For 2010 -Treasury Official"

On September 13, 2010, the Wall Street Journal (Dow Jones Newswires) published Estate Tax Choice May Be In Works For 2010 -Treasury Official, by Martin Vaughan:

The estates of those who died this year might be allowed to be taxed as if they died in 2009, in order to resolve a problem created by the repeal of the estate tax, a Treasury Department official said. . . . 

"We need to figure out what to do with this gap period, and one possibility would be to look to filling that gap with an election to apply 2009 law," Mundaca said.

Vaughan reviews other options that are available:

Another option would be to impose estate tax rules retroactively for 2010, but that would be opposed by congressional Republicans and likely some Democrats. A third option would be to leave 2010 law the way it is and pass estate tax changes only prospectively.

See also: Kim Dixon (Reuters): "Obama mulls estate tax choice", Future of the Federal Estate Tax.

(Hat tip: Michael Hepner, a benefits professional; and DPD, a 2010 beneficiary.  You will learn more about DPD in a forthcoming post.)

Mark Klimek (WSJ): "Doing Nothing Not An Option For Estates"

On August 30, 2010, the Wall Street Journal published Doing Nothing Not An Option For Estates*, by Mark Klimek, in Practice Management (“a column that looks at ways financial advisers can build and improve their business”). 

Klimek interviewed Justin Stets, a principal at Carlson Capital Management in Northfield, Minn.  Klimek writes, “Sometimes, when the picture is cloudy, the smartest investment move is to do nothing. But that's not the case with estate planning, says wealth manager Justin Stets.”  The article then discusses the planning Stets did last year for a retired couple. 

Read Klimek’s article to find out how Stets

• reduced the couple’s potential estate tax by about $2.5 million,
• generated cash flow out of “highly illiquid assets, including real estate and family-owned businesses,”
• transferred life insurance out of an estate, and
• increased the amount of wealth that the couple can transfer to their children by $6.5 million -- from $15.5 million to $22 million.

Klimek concludes by writing, “In this case, taking action paid off.”

(* Note: If you click on the hyperlink and the article requests a subscription, try Googling the title of the article.)