|
December 21, 2009 |
Estate Tax Repeal: Unexpected But Not a Reason to Celebrate, or Panic Several key members of Congress have acknowledged that efforts to pass new estate tax legislation this year appear to have failed. Last-minute action by Congress is still possible but, barring that, the federal estate tax will be repealed as of January 1, 2010. It is likely, however, that Congress will act early in 2010 to restore the estate tax and do so retroactive to January 1, 2010. In commenting on the current situation, Representative Earl Pomeroy (D-N.D.) said, "The prospects are 100% that Congress will come back next year and reinstate the tax, and make it retroactive to January 1, 2010." Of course we have learned that there is never 100% certainty about anything Congress intends to do. The repeal of the estate tax as of January 1, 2010 was part of legislation enacted in 2001, which implemented a gradual increase in the estate tax exemption amount and reduction of estate tax rates. The legislation culminates with repeal of the estate tax in 2010, followed by its reinstatement in 2011, with a reversion to the transfer tax rules in effect in 2001. That would mean a return to a $1 million estate tax exemption amount and a 55% top estate tax rate. Congress' inaction leaves taxpayers in a state of uncertainty as we enter 2010. There is no absolute guarantee that Congress will act in 2010, or whether they will make changes retroactive to January 1, 2010 if they do act. The lack of consensus in Congress creates doubt about what any new legislation will provide. It appeared earlier this year that a permanent extension of the current $3.5 million estate tax exemption and 45% top rate had broad support, but that no longer seems to be the case. These developments are important, but are neither a cause for celebration or a reason to panic. No one should assume that the assets of a person who dies in 2010 will pass free of estate tax, even if the law says there is no estate tax on the date of the person's death. Congress has made retroactive tax law changes before and they generally are upheld. At the same time, the current state of uncertainty should not require any immediate wholesale changes to taxpayers' estate plans. Most well-drafted plans will carry out the individual's fundamental dispositive goals unless and until Congress acts to create a new and different estate tax system. However, the plans of some individuals may be distorted if they die when no estate or generation-skipping tax is in effect. While, for most, no changes will be needed, anyone who would like to confirm no problems exist under his or her current estate plan should call us to request a quick review. |