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Financial Planning > Tax Planning > Tax Reform

Estate tax remains in limbo

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For the first time since 1915, the United States has no estate tax. And a lot of planners and their clients are left to deal with the uncertainty this situation has created.

Thanks to Congress’ inability to act before the estate tax lapsed at midnight on Dec. 31, we now have the potential for excessive litigation which will inevitably come to pass if Congress, sometime after reconvening on Tuesday, decides as many expect to restore the estate tax retroactively to Jan. 1. It will be argued that such a move is unconstitutional.

Of course this could have been avoided back on Dec. 16 if the Senate was able to take its health care reform blinders off for the equivalent of a millisecond and simply extend current estate tax law for three months, as requested by Sen. Max Baucus, D-Mont.

It didn’t happen, and while a mere extension would have left plenty of uncertainty as to the future of the estate tax, we now have all that uncertainty along with looming legal battles that could well extend all the way to the Supreme Court.

Sarah Spear, director of policy and public affairs for the Association for Advanced Life Underwriting, told National Underwriter Life & Health recently that “the vehicle and timing of a decision remain unclear.” (read the full article here) Spear went on to say that producers are being affected by the uncertainty in issues such as reviewing the bypass trusts, gifting to grandchildren because of the absence of a generation-skipping transfer tax and carry-over basis issues.

There had been an effort in the House in early December to establish the estate tax at a $3.5 million per-person exemption and a maximum tax rate of 45%. And Sen. Blanche Lincoln, D-Ark., and Jon Kyl, R-Ariz., had proposed a permanent estate tax with a $5 million per-person exemption and a maximum tax rate of 35%. Under current law, the estate tax would return from a one-year holiday in 2011 with an exemption of $1 million and a top tax rate of 55%.

What will happen when Congress readdresses the issue – probably in February – remains uncertain. You can bet something will be done – divided or not, the government will not give away hundreds of millions in estate tax revenues by allowing that one-year holiday all year. And whatever they decide on will likely be retroactive to Jan. 1. Then down the road the courts will get to decide if that’s legal or not.