STATE of the ESTATE TAX

BusinessWest, Sep 1, 2008 by O'Brien, George

Jeff Roberts has heard a lot of jokes - or at least attempts at humor - regarding the year 2010.

"People will say, 'well, I guess I better die then,'" said Roberts, an estate-planning specialist with the Springfield-based firm Robinson Donovan, in reference to a year when there is set to be what amounts to no federal estate tax liability. "If it's a husband saying that, and his wife is there with him, I'll always say, 'that's fine, but in truth, you both need to die then.'"

Roberts is joking when he says this, obviously, but making an all-important point. Assets - most of them, anyway - will pass down from the husband to the spouse, he explained, and will, in all likelihood, be subject to a federal estate tax down the road. So dying two years from now probably won't be of much benefit to descendents.

"Everyone's focused on 2010," said Roberts, adding that there's been no shortage of jokes about that being the year wealthy individuals might (or should) meet their demise. "But they should really be focused on 2011 and beyond."

But that's somewhat difficult, because no one knows for sure what Congress will do with the estate tax over the next 24 months or so (a new measure doesn't need to be in place before the fall of 2010). The current exemption is $2 million per individual, up from $1 million when tax-cutting legislation was passed seven years ago. On Jan. 1, 2009, the exemption will go to $3.5 million, and a year later, the tax is due to be repealed altogether. But, unless current legislation is amended, the exemption goes back to $1 million, which isn't a lot of money in 2008 and will be even less in 2011.

There is plenty of speculation, and somewhat of a consensus, that the so-called "death tax" will not be permanently eliminated, although some say it should be, said Hyman Darling, an estate-planning specialist with the Springfield-based firm Bacon Wilson, who paraphrased Mark Twain when he said that rumors of the estate tax's death are greatly exaggerated - and quite premature. The tax only accounts for roughly 1% of the income received by the federal government, he explained, and many government leaders, especially conservatives, want the death tax to die.

But a record federal budget deficit, coupled with an expensive war in Iraq and persistent lobbying from those representing charities - who feel their causes will be hurt if individuals no longer need the existing charitable deduction - and other groups make full elimination of the tax unlikely, said Darling.

But there is also a growing consensus that the exemption will not revert to $1 million. Indeed, numbers being suggested range from the current $2 million to the more probable $3.5 million to the highly improbable (some conservatives have tossed out figures as high as $15 million), said Darling, adding that debate will also ensue on what the estate tax rate will be; it is currently 45% and will likely stay at or near that figure, he believes.

While there is some sense of probability regarding a period (post-2010) of relative uncertainty, individuals still need to plan, said Roberts, adding that amid all the question marks lie some simple truths - such as the state's estate tax, which isn't going anywhere, and the fact that, while $2 million or $3.5 million may sound like big numbers, in this day and age, they aren't, especially for business owners, and people who may not think they're in the 'wealthy' category still need to pay attention to the death tax.

"For most people, the fact that the estate tax is slated to be repealed is not the issue, because they're not planning on dying in 2010 and would prefer not to," he explained. "What's scaring the pants off everybody is that the exemption will revert to $1 million if Congress doesn't do something about it."

As Certain as Death and Taxes

Tracing the recent history of the estate tax, Darling said the current situation - and speculation about the future - result from President Bush's attempts to fulfill a 2000 election-year campaign promise to do away with the estate tax. He and a Republican-controlled Congress brought some relief, but not what amounts to a toe tag for the death tax.

The legislation that passed in 2001 as part of a $1.35 trillion tax cut raised the estate-tax exemption first to $1 million, then to $1.5 million, and then to the current $2 million, with the provision that it will become $3.5 million on Jan. 1, 2009. Meanwhile, the highest rate on these taxes has gone from 50% steadily down to 45%. The legislation, which calls for an unlimited exemption in 2010, will sunset at the end of that year, meaning, effectively, that if Congress does nothing by the end of 2010, the death tax exemption will revert to that $1 million number.

But that's not likely.

Both presidential candidates actually support some form of estate tax - although they differ slightly on exemption numbers and rates - and most pundits say a Democratically controlled Congress simply will not choose to do without the revenue gained from the estate tax, however small the number may appear.