When it comes to wealth management and federal legislation, you can't find a more important issue than the future of the estate tax, known as the Death Tax in Republican circles. To recap, under the 2001 Economic Growth and Tax Relief Reconciliation Act (EGTRRA), the estate tax exclusion will rise from $2 million for decedents dying in 2008 to $3.5 million in 2009, to zero for those dying in 2010 when the estate tax will, uh, die.
At that point, the Congressional Research Service reported in February, there will also be a big change in the method used to determine the basis of all capital assets transferred at death, from the step-up in basis to modified carryover basis. The CRS notes, "Whatever basis-valuation rule is in effect for the year of death applies to all capital assets transferred after any person's death, whether or not their estate is large enough to be liable for the estate tax."
However, the good times are coming to an end for clients who die then-in more ways than one. EGTRRA's estate tax provisions are scheduled to sunset at the end of 2010, and if Congress doesn't act before Jan. 1, 2011, it will be a do-over: Both the estate and gift tax laws will revert to pre-EGTRRA levels. There will be a unified estate and gift tax with a combined exclusion of $1 million, and the maximum tax rate will go back to 55 percent (from the 45 percent maximum that applied from 2007 to 2009).
Not surprisingly for a tax mechanism that the Treasury Department estimates would cost the government $58 billion in lost revenue in FY 2012, the prospect of losing such a revenue generator-not to mention the populist political possibilities in a Presidential election year-has spawned considerable legislative activity in the 110th Congress.
No less than 11 bills have been introduced in the House and Senate to permanently repeal the estate tax, while eight have been floated to modify it. Since the sun will set during their watch, the major Presidential candidates have, of course, weighed in. Democrat Barack Obama has voiced his commitment to letting the Bush tax cuts disappear and bringing back the higher death tax rates, while Republican standard-bearer John McCain pledges to keep those cuts in force. Whatever eventually happens, expect plenty of grandstanding, and while the aphorism may be accurate that people should never watch as sausages-or legislation-are being made, this is one area where targeted lobbying may have an effect on your clients'-and their heirs'-future.
James J. Green, Editorial Director, can be reached at firstname.lastname@example.org