Will Congress Act on Estate Tax Before the End of 2012?

06/15/2012

The estate tax law has been in a flux for some time now.  It seems whenever Congress acts to change the estate tax law, they put a sunset provision in the law so after a little bit of time, the law reverts back to what it was before Congress made the change.  For 2012, a person can leave $5,000,000 (assuming no lifetime taxable gifts) without having to pay an estate tax.  In 2013, this amount will revert to $1,000,000 because of the sunset provsion unless Congress acts.

Most people want certainty in the tax law.  To that end, regardless of where the federal estate tax exemption ends up, there needs to be a permanent solution so people can plan.  So will Congress act before the end of 2012 and do something with the estate tax?  This is the $1,000,000 (or $5,000,000) question.

The way I see it, three things could happen.

First, Congress could actually do something and come up with a long-term estate tax law change.  I do not believe this will happen before the end of the year.  I believe this because the Democrats and Republicans do not agree on a long term fix.  Further, this is an election year so I don't see our do-nothing Congress actually doing something for fear that the other political party could get credit or a political party could take unnecessary heat.

Second, Congress could do nothing and let the credit revert back to $1,000,000.  At first glance this seems unlikely because Republicans generally want to completely repeal the estate tax and Democrats generally want the exemption to hover somewhere in the $3,500,000 to $5,000,000 range.  However, this is an election year.  A party might feel they chould gain political capital by letting the law expire and blaming the other party.  Therefore, this option is a possibility, although in my heart of hearts I do not believe letting the exemption revert down to $1,000,000 will be a long term solution.

Third, Congress could pass a stop gap law or patch (like what they do with AMT) and keep the exemption at $5,000,000 for a year or so.  This is a possibility also, but again, even a patch would require Congressional agreement which could be difficult in an election year. 

I do not have a crystal ball.  If I had to put the odds on the choices, I do not think a permanent law (option one) will get passed before the end of 2012.  Given this, I would like to at least see an estate tax patch, but I would not be surprised if the law reverts to $1,000,000 for a short period of time.