What the federal estate tax will look like a few years from now is anyone’s guess. The current federal estate tax exemption amount is $2,000,000, and there is a flat tax rate of 45 percent. The exemption will increase to $3,500,000 in 2009. Under the Economic Growth and Tax Relief Reconciliation Act of 2001 (the “2001 Act”), the estate tax would be repealed in 2010. The 2001 Act “sunsets” in 2011, and the estate tax would be reinstated with a maximum rate of 55 percent and an exemption of $1,000,000.
Practically no one believes that Congress will allow the estate tax to disappear in 2010, only to reappear in 2011 with an exemption lower than the exemption in effect today. On the other hand, no one is sure exactly what Congress will do. Perhaps the only certainty is that Congress will not enact full repeal of the federal estate tax. Given the current composition of Congress and the projected cost of full repeal, it is safe to say that estate and trust practitioners will have to deal with some version of the federal estate tax for the foreseeable future.
Most observers believe that after the exemption increases to $3,500,000 in 2009, it will remain at least at that level. Many believe that it will increase somewhat beyond that, perhaps to $4,000,000 or $5,000,000. At that point, the exemption might be indexed for inflation. Some members of Congress have proposed making the exemption transferable to a surviving spouse, which could eliminate the need for bypass trusts in estates at the lower end of the wealth spectrum. For larger estates, it still would make sense to shelter assets in a bypass trust at the first spouse’s death so that those assets could grow as much as possible and pass free of estate tax at the second spouse’s death. In lieu of increasing the exemption (or perhaps in conjunction with it), Congress might reduce the rate from 45 percent to 35 percent, or even 25 percent.
As has been the case since at least 2000, the real battle over the estate tax is taking place in the U.S. Senate. Both the Democrats and the Republicans seem ready to reform the estate tax, but they are approaching it from different directions. The Democrats seem to prefer an increase in the exemption, while the Republicans seem more intent on reducing the tax rate. A running joke is that the Democrats want to protect the “merely” rich, while the Republicans want to protect the “really, really” rich. After all, a person with $4,000,000 in assets will benefit more from an increase in the exemption than from a decrease in the tax rate. On the other hand, someone with $100,000,000 will benefit far more from a drop in the tax rate than from a relatively modest rise in the exemption.
It is highly unlikely that Congress will address the estate tax during 2008 (an election year). In 2009, Congress seemingly will be forced to do something, due to the sunset provision in the current law. On the other hand, Professor Jeff Pennell of the Emory University School of Law recently suggested at a presentation before the Baltimore Estate Planning Council that Congress could defer action until as late as October 2010 (when the first estate tax returns for decedents dying in 2010 would be due), and then Congress could make the legislation retroactive to the beginning of 2010. For now, we can only guess the future of the federal estate tax.
For prior discussions of the federal estate tax, see “Death and Taxes,” Bar Bulletin (Jan. 2006); “The Uncertainty of Death Taxes,” Bar Bulletin (Feb. 2003); “Is the Death of the Death Tax Greatly Exaggerated?” Bar Bulletin (Feb. 2002). For prior discussions of the Maryland estate tax, see “The Ever-Changing Maryland Estate Tax,” Maryland Bar Journal (Nov./Dec. 2006); “New Unimproved Maryland Estate Tax,” Maryland Bar Journal (Mar./Apr. 2005).
Edwin G. Fee, Jr., a partner with Whiteford, Taylor & Preston L.L.P., is the immediate past Chair of the MSBA Estate & Trust Law Section.