As the months pass, the future of the estate tax is becoming more obvious. The tax will be back on January 1, 2011. Estates greater than $1 million will be taxed, and the highest tax rate for many estates will be 55 percent. Estates with extraordinary bad planning could see higher rates, such as more than 80 percent. How do you get that high? Just give your $20 million estate to your grandchildren and trigger the generation skipping tax in addition to the estate tax.
But why would the Democratic leadership in Congress allow the estate tax to make a comeback? The reason is simple: Taxes can be raised and the deficit can be decreased without having any member of Congress vote on federal estate taxes. Do nothing and the Bush tax cuts will expire without any outside help. They are part of a 10-year bill that expires on Dec. 31 of this year.
How much will the death of the Bush tax cuts raise? About $250 billion a year from the new estate tax and about $150 billion a year from higher income tax brackets, a 20 percent capital gains tax, and other increases. That's $400 billion a year.
All of this can be accomplished by having the Congress do nothing. But don't blame the House for this little problem. The House has sent hundreds of bills to the Senate this year, and not gotten much in return. The Senate will be the place where nothing will get done because of the 60 percent cloture votes needed to stop filibusters.
Failure to pass these cloture votes has stopped the Senate from taking action on several issues, but the Bush tax cuts won't be one of them. There will be no cloture vote needed to take no action on the Bush tax cuts. All the Democrats need to do is take it easy until Dec. 31.
The Republicans will be apoplectic, of course, but what are their options? The Democrats don't have to compromise on the tax issue, and the solutions that appeal to the Democrats are not acceptable to the Republicans. The Republicans can't push bills through the Senate because they're not in charge. There might even be some Republican deficit hawks who like the idea of cutting $400 billion out of the deficit. And, of course, they don't need to vote on this issue either.
I'd rather see a compromise solution to the tax problem right now so I can go back to helping my clients with their estate tax problems. But you have to admit that the non-action on the Bush tax cuts is going to become much more interesting and humorous as the months pass. It might even become the biggest political prank of the decade.
For more estate planning, go to California Living Trusts.
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