ElderLaw Answers Blog

The federal estate tax is scheduled to disappear for one year for those who die between January 1 and December 31, 2010, and then to ratchet back to apply to all estates over $1 million beginning in 2011. Four out of five of the respondents to our survey (at www.elderlawanswers.com) expect Congress to act before this happens, but the number of days left in the year is dwindling.

This strange estate tax situation results from a compromise between President Bush and Congress. President Bush and his supporters wanted to repeal the estate tax, which they called the “death” tax entirely, but a majority of Congress did not. So, they phased out the threshold at which the tax would apply from $1 million, to $2 million, to $3.5 million for those dying this year, to one tax free year in 2011.

During this time, according to the IRS, the number of estates filing returns dropped from 108,000 in 2001 when the threshold was $675,000 to 38,000 last year when the threshold was $2 million. But the number of those who would have had to file returns under the current $3.5 million limit rose from 9,500 to more than 14,000 during the same time period. Both are small numbers given the number of people in the United States.

Just about all commentators have expected Congress to act to change the law before now, and certainly before 2011 when the threshold drops back to $1 million. Most commentators now expect Congress to fix the limit at $3.5 million. I have long predicted a $2 million limit. What do you think Congress will do? What should it do?

Ever since Congress passed and President Bush signed the phase-out of the estate tax in 2001, everyone expected Congress to make a permanent change by now.  Under the current law, the threshold at which estates are taxed increased from $1 million in 2001 to $3.5 million for those dying this year.  For those dying in 2010, there is no tax no matter the size of the estate, but for those who make it to 2011, the threshold returns to $1 million.

I have long predicted that Congress would ultimately fix the threshold at $2 million, the figure in place from 2006 to 2008.  Until recently, however, the weight of opinion was that Congress would make this year’s $3.5 million figure permanent.

But, so far, Congress has not acted and it’s unlikely to act before the end of the year with health care reform and other large topics on its agenda.  The current scuttlebutt is that Congress will extend the $3.5 million threshold through 2010 and address a permanent resolution next year.

My prediction of a $2 million threshold is beginning to look more and more likely because the federal government needs the money.  With larger and larger deficits facing us for decades to come, the question is where can government cut expenses and where can it raise money with the least pain to the fewest people?  Since fewer than 1 percent of estates pay any estate tax, clearly it affects the fewest people. 

And the amount of money at stake, while a small part of the government’s entire revenue, is anything but paltry.  One estimate of the difference in revenues from 2011 to 2018 between a $1 million and a $3.5 million threshold is $200 billion.

Given the need for funds and the recent financial debacle seen as caused by many on Wall Street who do pay estate taxes, it may be hard to explain why those with estates over $2 million ($4 million for a married couple) shouldn’t pay any taxes.  This is especially so if the alternative is higher taxes or lower benefits for everyone else.

One prognosticator, John J. Scroggin, founding editor of the NAEPC Journal of Estate and Tax Planning and prior co-editor of Commerce Clearing House’s Journal of Practical Estate Planning, recently handicapped the likely outcomes as follows:  $1 million threshold – 40%; $2 million threshold – 40%; $3.5 million threshold – 10%; Congress puts off a decision beyond 2010 – 10%.  It will be interesting to see the outcome, especially for those whose estates exceed $1 million ($2 million for a married couple) — or at least for their heirs.

Just over half (51%) of the respondents to the ElderLawAnswers survey on the whether there should be a federal estate tax and, if so, at what level should it begin, voted against there being tax at all.  Almost a fifth (19%) felt the cut off should stick at the current $3.5 million level.  Fewer than one in three felt that the smaller estates should be taxed, with 16% calling for a tax on estate of more than $1 million and 12% for a tax on estates larger than $2 million.

As the law stands now, only those estates over $3.5 million are taxed and for those dying in 2010, there’s no estate tax.  However, if Congress doesn’t act, the threshhold will revert back to $1 million for those dying in 2011 or thereafter, the figure in place before the Bush tax cuts.  Everyone expects Congress to act this year, and the current betting is for a permanent $3.5 million threshhold.

I’m in the $2 million camp.  With relatively minor planning, both members of a couple can exclude the full exempt amount, so this would mean a $4 million exemption for married couples.  While no one likes to pay taxes, this comes down to a question of fairness.  Money must be raised for the necessary expenses of government, whether that’s paving our roads, educating our children, bailing out our bankers, or protecting our borders. 

If we don’t do this by taxing the estates of the richest Americans, we’ll have to do so by raising income taxes or by borrowing, pushing the cost onto our children and grandchildren.  It is only fair that those who benefited most financially from the American system should be called upon to support that system rather than relying on others, whether now or in the future, to do so.

That said, I do feel that the estate tax rate, beginning at 45% is too high.  A lower, more graduated rate, may in fact reap more revenue since taxpayers would be less driven to avoid it.