My comments: The Federal Estate Tax, much discussed and vilified by pundits everywhere, is essentially a voluntary tax. There are dozens of techniques and strategies available to someone to minimize, if not eliminate, the tax burden that falls to the heirs of someone whose assets are subject to the tax. That taxes are paid is usually a tribute to the inability or unwillingness of the deceased to do the necessary planning. It never ceases to amaze me when I see an article describing the circumstances of someone’s death and praise given to the planners that the tax bill was “only” $100M.

This summary comes from Julius H. Giamarco, Esq. who practices law in Troy, MI. I’ve been on his email list for years and enjoy his comments. Notice the name of their web site: http://www.disinherit-irs.com/

The December 2010 tax compromise between President Obama and Republican lawmakers provided for a $5 million gift and estate tax exemption ($10 million for a married couple). Assets exceeding that amount are taxed at a 35% rate. The $5 million exemption is indexed for inflation beginning in 2012 ($5.12 million). The Act also unifies the gift and estate tax exemption so that the $5 million exemption can be used to make lifetime gifts and/or testamentary bequests. The Act also provides for “portability,” a feature that eliminates the need for a married couple to establish a Credit Shelter Trust to ensure that their heirs receive the benefit of both spouse’s estate tax exemptions. The Tax Relief Act of 2010 that established the current estate tax rules is set to expire on January 1, 2013.

Pursuant to the Budget Control Act of 2011, the so-called “Super Committee” had until November 23, 2011, to issue a formal proposal containing at least $1.2 trillion in deficit reduction for the full Congress to consider. Among the rumors circulating, as the Committee neared decision time, was that the gift tax exemption amount would be decreased to $1 million effective January 1, 2012, instead of January 1, 2013. Some even predicted that the decrease would take effect on November 23, 2011. In the end, the Super Committee made no decision.

President Obama’s 2012 budget proposes to bring the estate tax exemption back to 2009 levels – $3.5 million with a maximum 45% tax rate. The President also wants to eliminate unification by making the gift and generation-skipping tax exemption $1 million, with a top rate of 45%. The President also proposes to make the portability provision permanent so that married couples may continue to carry over unused exemptions, but the exemption amount that would be preserved would be limited to the estate and gift exemption in effect in 2013 and beyond.

In contrast to the President’s proposal, every Republican candidate for President wants the federal estate tax repealed. The most often cited reasons for repealing the estate tax are that many small businesses and family farms have to be sold to pay estate taxes, and that the estate tax (along with the income tax) stifles saving and investing, thereby undermining job creation and productivity. Most Democrats counter by pointing out that reducing or eliminating estate taxes for the richest 1% of Americans is bad policy, given the large deficits facing the US.

So, the fate of the federal estate tax likely lies in the results of the next election. Here are the most likely scenarios:
1. Scenario No. 1: Because of continued gridlock and Congress’s reluctance to address entitlements and tax reform in an election year, Congress could allow the new law to sunset (as it is scheduled to do on December 31, 2012). Since this scenario is already in place, it requires no further Congressional action. If this happens, then a $1,000,000 estate tax exemption and 55% estate tax rate will begin on January 1, 2013. It’s also possible under this scenario that if the new Congress strikes a deal on the estate tax, the new law will be made retroactive back to January 1, 2013. Support for this scenario recently came from Congressman Jim McDermott of Washington, a senior member of the House Ways and Means Committee. On November 17, 2011, Congressman McDermott introduced the “Sensible Estate Tax Act of 2011.” The bill would, among other things, roll back the top estate tax rate to 55%, with a $1 million exemption ($2 million for married couples) indexed for inflation. The bill would also retain both unification and portability.

2. Scenario No. 2: If neither Party has complete control over tax legislation, Congress could extend the 2010 law in 2013 and beyond. This would mean that the estate tax exemption would be indexed for inflation above the $5,120,000 exemption that will go into effect in 2012 and the top rate would remain at 35%. Under this scenario, unification and portability remain intact. If this scenario occurs, then the estate tax will be de facto repealed for more than 99% of Americans. According to estimates from the Tax Policy Center there are only an estimated 3,300 estates in the US that would owe federal estate taxes in 2011 under the current exemption of $5 million.

3. Scenario No. 3: If the Democrats control tax legislation, Congress could pass some form of an estate tax compromise which will lower the estate tax exemption and increase the estate tax rate to something more in line with the 2009 numbers, as the President has proposed for his 2013 budget.

4. Scenario No. 4: If the Republicans control tax legislation, Congress could permanently repeal the federal estate tax (and bring back carry-over basis). If a Republican wins the White House, this is a distinct possibility given that Republicans are in control of the House and have gained significant ground in the Senate (where 60 votes are needed to repeal the estate tax). Support for repealing the estate tax comes from a recent study commissioned by the American Family Business Foundation and conducted at the Institute for Research on the Economics of Taxation. The study found that repealing the estate tax would increase GDP by 2.26% by 2021, and would generate enough revenue over a ten year period to cover almost a third of the current $1.2 trillion in deficit reduction. Additional support for repealing the estate tax is that it represents a negligible amount of the Government’s revenue. According to the Congressional Research Service, with a $5 million exemption and a top rate of 35%, only $11 billion in estate taxes will be raised. That amount only contributes 0.321% of the $3.5 trillion needed for the government’s estimated annual budget. Some observers predict that the Republicans might even be willing to trade higher income tax rates for the repeal of the estate tax.

The bottom line is that it’s impossible to know how and when lawmakers will act (and whether any new law will be permanent or just another extender bill). And that makes it exceedingly difficult for clients (and their advisors) to do any intelligent estate planning.

For more information regarding this topic, please e-mail your requests to Julius Giarmarco, or call Julius at (248) 457-7200.