I intentionally waited until after President Obama's State of the Union Address to post my commentary of current state of the federal estate tax because a part of me was hoping that either Congress or the President would have clarified the situation by now. Unfortunately for me, my fellow estate planning attorneys, and everyone affected or potentially affected by the estate tax, things are no clearer today than they were on January 1, 2010.
The reality is this: At the present time there is no federal estate tax for deaths occurring between January 1, 2010 and December 31, 2010. This estate tax "repeal" is part of the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA") (also affectionately/unofficially known as the "Bush Tax Cuts." As I have discussed previously on this blog the EGTRAA is set to sunset (i.e. expire) on January 1, 2011, roughly 10 years after the it was signed into law. I will not go into exhaustive detail as to why the sunset provision was included in the bill, but I will say that it was added to the bill as an end run around the Byrd Rule (a Senate rule), which allows Senators to block a piece of legislation if it purports to significantly increase the federal deficit beyond a ten-year term.
On the surface the fact that we have reached 2010 with EGTRRA still in full-force seems like a good thing for individuals with large estates. In fact it may well play out to be a good thing depending on Congress's actions this year. However, therein lies the problem for a couple of reasons. One, since Congress has not acted we are in an unenviable position of not having anything resembling clarity in regards to the current, let alone, the future federal estate tax system. Given this uncertainty, it is extremely difficult to advise clients on matters related to the estate tax so it is difficult to be proactive in the estate planning realm at the moment. Second, there is a thought shared by many commentators that Congress may look to make any changes to the federal estate tax system retroactive to January 1, 2010. This makes it difficult to properly administer estates for individuals that die after January 1, 2010 and the date the any new estate tax law is passed. Therefore, even reactionary planning and tax compliance are complicated by the uncertainty in the estate tax arena.
It does not give me great joy to deliver this state of the federal estate tax system to this blog's readers or to my clients. Unfortunately, it is the reality we find ourselves in for the foreseeable future. We simply do not know when or if Congress will revisit the federal estate tax issue this year. In the event that they do not act the entirety of EGTRRA will expire, which will mean the pre-2001 federal estate tax system will return in full force. That means the estate tax exemption returns to $1 million per person, the estate tax rate will be 55%, step-up basis returns after a one year hiatus, and the federal estate tax credit for state death taxes paid returns. The return of that last item will in turn reignite numerous state estate tax systems that have been dormant since the federal estate tax credit of state death taxes was transitioned to a deduction. Wisconsin is on such "pick-up" estate tax states that will go from having no estate tax on December 31, 2010 to having an estate tax on January 1, 2011.
I will do my best to monitor the situation and I will pass on any commentary or thoughts that I come across on the federal estate tax matter as we move forward. We have less than 11 months remaining in 2010 so presumably the window of opportunity is closing quickly. However, Washington had almost 9 years to plan for this and yet here we are, so I would not recommend holding one's breath.