Benjamin Franklin reminded us that life has two certainties: death and taxes. In 1916, Congress linked them by imposing an estate tax. Over the decades, the particulars have changed — the tax rate, the amount exempted from the tax — but the “death tax” concept has been as reliable as Old Ben’s bromide suggested.
This year is different. Since Jan. 1, there’s been no federal estate tax. For many a boomer, that’s a big deal. We’re of an age when death is no longer a distant knell. If our parents, bless ’em, are still with us, let’s hope they have their estate planning in order. And check the ages in the obits. A boomer who doesn’t have a last will and testament has procrastinated beyond what’s prudent.
Two questions: How come there’s no estate tax this year? And is this a permanent change?
Two answers: Politics. And, no, the change is probably not permanent.
George W. Bush’s 2001 tax-cut package gradually raised the portion of an estate exempt from taxes from $1 million in 2002 to $3.5 million last year. And it brought the top tax rate, which had already been lowered from 55 percent to 50 percent, down to 45 percent. But in 2010, the last year of Bush’s package, no more gradual change. The estate tax just disappears.
Lawmakers from both sides of the aisle had expected to get back to the law before this year and extend the tax rather than have it evaporate. Attempts were made over the years, but in the increasingly uncooperative atmosphere that permeates Congress, it didn’t get done. Here’s the catch: The law has a sunset provision. If Congress doesn’t act, in 2011 we go back to the pre-cut terms — an exemption of just $1 million and a top rate of 55 percent.
Congress has options here: Do nothing and revert to the harsher pre-tax-cut terms. Repeal the estate tax permanently. Reinstate the tax with terms easier on a beneficiary. Pass a law that’s retroactive to the beginning of this year — a maneuver that experts say would almost certainly trigger a constitutional challenge.
But the two parties, and factions within the parties, disagree about exemptions and tax rates. Political paralysis?
Dana G. Fitzsimons Jr., a lawyer and partner with McGuireWoods, says the “extraordinarily toxic climate” in Washington makes it pointless to predict what Congress will do. He hopes lawmakers will put aside partisan bickering and recognize that “American taxpayers are in need of stability.”
Fitzsimons and Howard Zaritsky helped state legislators draft a bill — which sailed through the General Assembly this year — giving Virginians some measure of certainty and stability. Because many wills and trusts have provisions derived from the federal statute, there was a danger that in the absence of a federal estate-tax law, beneficiaries and potential beneficiaries would clog the state court system with their own interpretations of what had heretofore been routine language. Until there’s a new federal law, the interpretation in Virginia this year will be based on the 2009 version of the federal statute.
Many financial advisers, assuming that at some point Congress will again have an estate tax in place, urge clients to continue to structure their estates to minimize the tax bite.
For example, Dick Conway of Conway Insurance Planning says that “in some instances married couples can reduce or even eliminate estate taxes by using the proper trust to hold and own life insurance.” Both Conway and Fitzsimons cite the need for careful planning tailored to a family’s needs.
One outfit that thinks Congress should consider making the repeal of the estate tax permanent is the Dallas-based National Center for Policy Analysis. Pamela Villarreal, a retirement and tax analyst with the conservative-leaning think tank, says one of the myths about the estate tax is that it affects only the very wealthy. She says small businesses can be devastated by a big tax bill.
“Say your family owns a Christmas tree farm in Virginia,” she says. “This is a small business; you’re only making $50,000 a year. But if the parent dies and the farm passes to an heir, the land may be worth enough and the estate tax heavy enough that the heir has to sell the land to pay the tax.”
Randy Hallman is a Richmond-based freelance writer.
