With healthcare, energy, and the financial markets occupying most of Congress’ attention, the estate tax has taken a backseat, but expect that to change this fall. Barring legislative action, the estate tax will go away in 2010 and return in 2011 for estates valued at greater than $1 million. Lawmakers will not allow a repeal of the estate tax, not even for a single year, and so we expect action to be taken on the estate tax issue very soon.
The likely result of any estate tax legislation will be a freeze of the estate tax exemption and tax rates at 2009 levels ($3.5 million exemption and 45% top tax rate). Whether this takes the form of a permanent freeze or a one-year patch is anyone’s guess. Negotiations between the parties and the Senate and House may result in some change in the exemption amount and/or tax rates, but any deviation from the 2009 estate tax should be relatively minor.
Discussion will also center on reunifying the gift and estate tax exemptions, which would have the effect of raising the gift tax exemption, currently $1 million, to the estate tax exemption. This would give each taxpayer a $3.5 million exemption umbrella (assuming the 2009 exemption freeze) to offset any combination of taxable gifts and estate transfers.
Legislation will likely also consider the issue of the portability of unused estate tax exemptions. Right now, in order to fully utilize the estate tax exemption of each spouse, estate tax planners often deploy credit shelter trusts that can be costly to administer. Planners must also pay particular attention to the ownership of assets as well as named beneficiaries of those assets to ensure consistency with the estate plan. By allowing the first-to-die spouse to transfer the unused estate tax credit to the surviving spouse without the use of trusts and the balancing of assets between spouses, a married couple can avoid much of the expense and complexity associated with crafting and administering an effective estate plan.
Finally, expect the “new” estate tax exemption to be indexed for inflation. Lawmakers are sensitive to the argument that a static estate tax exemption adversely affects greater numbers of small businesses and family farms as the cost of living increases.