Politics and the Estate Tax


Whenever I meet with estate planning clients and estate tax is an issue, we not only have to talk about the estate tax law as it currently exists, but also what it might look like in the future with tax law sunset provisions and political bickering. 

Like many tax provisions, the federal estate tax has become a sticking point for members of Congress. While the Democrat-controlled Senate voted to extend the Bush-era tax cuts for everyone except single filers earning above $200,000 and joint filers earning above $250,000, the estate tax provisions which would have brought back the 2009 exemption and rate were stripped from the bill prior to the vote. On the other side, the Republican-controlled House voted to extend all of the Bush-era tax cuts and the current $5.12 million estate tax exemption and 35% estate tax rate. Congress then promptly adjourned, leaving the tax situation unresolved. Typical and and certainly not surprising.  What is becoming clear is that three distinct camps have emerged regarding the future of the estate tax:

  • The Extenders.  Those who want to extend the current $5.12 million estate tax exemption and 35% estate tax rate. This group is mainly comprised of Republicans as well as Democrats from agricultural states. They believe that the current exemption and rate are good for the economy and will prevent small businesses from having to be sold to pay the estate tax bill.
  • The Repealers.  Those who would really like to see the estate tax completely repealed.  This group consists mainly of Republicans.  Generally, they do not believe that they can garner enough votes to repeal the estate tax so they will side with the Extenders for now and work towards repeal in the future.
  • The Conformers.  Those who want to reinstate the 2009 estate tax exemption of $3.5 million and 2009 estate tax rate of 45%. This group is comprised of Democrats who have allied themselves with President Obama, who has supported the 2009 numbers as far back as his campaign days in 2008. They believe that the $5.12 million exemption is a bit too high and the 35% estate tax rate is a bit too low and the 2009 numbers are a good middle-of-the-road solution.
  • The Reverters.  Those who want the estate tax exemption and rate to revert back to the laws that went into effect in 2001, which would result in a $1 million estate tax exemption and 55% estate tax rate. This group is comprised of Democrats who believe that the 500% increase in the estate tax exemption in less than a decade is just too much and the 2001 estate tax rules are fair and equitable.  The Reverters will have their way if the law is allowed to sunset.

These three camps with very different opinions and views about the federal estate tax have led those who are closely watching the estate tax debate (me and you) to wonder what will be the end result. It seems like we've seen this moive before - at the end of 2009 and then again at the end of 2010 - when Congress and President Obama did two highly unanticipated things: first let the estate tax be repealed, and then significantly increased the estate tax exemption by $1.5 million. Both of these things were temporary, although one was by default and the other was by deliberate action. And yet here we are again, knocking on the door of another year with the temporary "fix" set to expire.