Is There Hope for New Estate Tax Legislation in 2010?

NB: This article was published on April 28, 2010 and contains information that may be outdated. For current information regarding the estate tax, read: Estate Tax Certainty…For Now.

Most estate planning attorney never believed that Congress would let the estate tax expire. And when it did, most expected that Congress would act quickly to revive the estate tax, possibly making it retroactive to the beginning of the year.

As April quickly draws to an end, Congress has not passed any new estate tax legislation, leaving the estate planning world in continued state of turmoil.

How did we get here?

In 2001, Congress passed the Economic Growth and Tax Relief Reconciliation Act (”EGTRRA), which gradually cut tax rates and increased the share of an estate exempt from tax.

In 2001, a maximum tax rate of 50 percent was levied on estates valued over $1 million, but in 2009 the maximum tax rate was 45 percent and applied only to estates valued over $3.5 million. Under EGTRRA, all estate taxes were repealed on January 1, 2010.

But unless Congress passes new legislation, the estate tax will return with a vengeance in 2011, exposing estates valued at more than $1 million dollars to a federal tax rate of up to 55 percent.

Will Congress pass new estate tax legislation in 2010?

Not everyone is convinced that Congress will pass new estate tax laws this year. One blogger recently suggested that Congress intends to do nothing. While that certainly is a possibility, I think it is unlikely in light of the fact there seems to be consensus among politicians on both sides of the political spectrum is that the $1 million exemption is too onerous.

In 2009, only 5,500 estates were large enough to incur any estate tax liability. If the exemption amount were at $1 million, more than 44,000 would face estate taxes, according to estimates by the Urban-Brookings Tax Policy Center.

While most of us would not consider ourselves millionaires, our estates include as assets such as 401ks, IRAs, and equity in our homes. Insurance policies can also easily push many estates over the $1 million threshold, making a lot more Americans vulnerable to estate tax.

Why is it taking so long?

Although there seems to be consensus that the $1 million exemption level is too onerous, members of Congress are arguing about how high the exemption and how low the tax rate should be.

Some politicians want to maintain last year’s exemption amount and tax rate, while others would like to increase the exemption amount to $5 million and reduce the tax rate to 35 percent. That argument may be important to those with very large estates, but for more than 99 percent of Americans, it really won’t make a difference.

Will new estate tax legislation apply retroactively?

As the year progresses, the chances that new tax legislation will apply retroactively is diminishing. This is especially so in light of recent news that billionaire Dan Duncan has died, making him the first billionaire to die this year.

By some estimates, his estate could have generated up to $4 billion in estate taxes had he died last year. But in 2010, his $9 billion estate passes to his heirs free of estate tax.

Since Duncan’s estate could generate a lot of revenue, making new estate tax legislation retroactive could be enticing. However, doing so would now guarantee a protracted legal battle involving Duncan’s heirs, who have a lot to lose with a retroactive law.

A glimmer of hope?

In recent weeks, there have been some indication that Congress finally intends to address this issue.

Last month, there was a report that a proposal introduced by Senators Jon Kyl and Blanche Lincoln that imposes a 35 percent tax on estates worth more than $5 million was gaining support in the House. Representative Sander Levin, acting chairperson of the House Ways and Means Committee indicated that the House would begin working towards reinstating the estate tax in April. And Nancy Pelosi indicated that permanent estate tax relief is making it’s way through Congress.

How long will it take? That’s anyone’s guess. Kevin Staker at the Estate Tax News Blog believes that Congress won’t act until after the November election.

Let’s all hope Congress can reach a consensus sooner. But more importantly, let’s hope it can reach a consensus this year.