Passage Likely for Estate-Tax

Although agreement seemed highly unlikely just weeks ago, Democratic support for a plan put forward by Republicans and accepted by President Obama seems to be gaining steam. The compromise in waiting would reinstate the estate tax at 35% for two years starting next year, with the first $5 million of an individual’s estate exempted. According to data from the nonpartisan Tax Policy Center, this plan would result in about 43,540 taxable estates in 2011, and raise about $34.4 billion.

Arizona Republican Jon Kyl authored the current estate tax provision accepted by the President. Although House Democrats offer tough opposition, it’s likely there are enough moderate Democrats to side with Republicans and President Obama to pass the bill. If Congress doesn’t act before the end of the year, the estate tax, which lapsed in 2010, is set to return at a 55% rate, with a $1 million exemption on January 1, 2011.

The battle over the state tax has long provoked heated philosophical debate. As Lee Farris, senior organizer on estate-tax policy for United for a Fair Economy, has noted, there’s more than simple politics at work as Congress works towards forging an agreement. According to Farris, “an agreement has proven more complicated than splitting the difference on the numbers because this has been cast as a moral issue” being debated between those who believe the estate tax destroys family businesses and those who argue it is necessary to preserve meritocracy in the U.S.

Interestingly, if a plan is passed this year, Congress may allow this year’s heirs to choose whether they factor taxes based on this year’s rules, whereby some inherited assets are subject to higher capital-gains taxes, or next year's rules – whatever they may be. Stay tuned.

The Grim Reaper at Work without the Tax Man

The recent death of two billionaires has thrust back into the spotlight the fact that Congress let the federal estate tax expire .

You may recall that 2010 began with personal finance pages running headlines like “On Your Mark, Get Set, Die!” Because Congress failed to pass a new estate tax law before the sunset of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), 2010 began without a federal estate tax. (Currently, if there’s no Congressional intervention, the estate tax will be re-instituted in 2011 at levels that applied prior to 2001--a $1 million exemption and a top tax rate of 55%. In 2009, the exemption was $3.5 million and the top rate was just 45%.

But let’s return to the families of the billionaires. In March, Texas billionaire Dan Duncan passed away with a fortune estimated by Forbes magazine to be worth $9 billion. Forbes estimates that had he survived until 2011, his estate would have been subject to approximately $4.95 billion in federal estate taxes. Also, last week when sports-business legend George Steinbrenner died of a heart attack, leaving behind a fortune estimated by Forbes worth $1.15 billion, his estate escaped paying an estimated $632 million in federal estate taxes--unless Congress makes whatever tax they settle on retroactive.

How did this happen in a nation where Ben Franklin famously quipped there are two guarantees--death and taxes? The fact Congress has failed to address the estate tax issue is a major breach of fiduciary duty as far as I am concerned. Their inaction has already cost the US government billions in taxes. Furthermore, it places families in the uncomfortable position of having to decide whether to unplug Mom or Dad to save millions in taxes.

Pay It Now, Or They Pay Later

Legislators in Congress are reportedly considering creating a kind of Roth IRA version of the estate tax. “On The Money,” a blog of the congressional newspaper The Hill, recently reported that lawmakers are debating whether to let taxpayers opt to pay estate taxes in advance so their heirs owe nothing. One version being bandied about would set the pre-paid tax at 35 percent on estates valued at more than $3.5 million.

The pressure is on to address the federal estate tax before the end of the year, when the rate jumps to 55 percent on estates worth more than $1 million. (Last year, estates were taxed at a rate of 45 percent on values greater than $3.5 million, a record exclusion.)

If you die this year, of course, you pay nothing—thanks to the repeal of the estate tax for 2010 that was part of a vast array of sunset provisions in the Economic Growth, Tax Relief and Reconciliation Act of 2001. Of course, Congress could still pass a retroactive estate tax for 2010.