Progress?

The Senate is quiet these days concerning the federal estate tax, but there may have been some slight progress. As you may recall from the early days of this saga, the House passed H.R. 4154 on Dec. 3 and sent it over to the Senate. The House bill would extend the $3.5 million exclusion amount for the estate tax and make it permanent. The Senate's original reaction seemed to be complete indifference and nothing apparently got done. In the meantime the federal estate tax was repealed for a year by a law passed in 2001.

But on Dec. 24 H.R. 4154 was read for the first time, and after the lengthy Senate recess, it was read for the second time on Jan. 20 and placed on the Senate Legislative Calendar under General Orders. Somebody is pushing this bill forward and perhaps it will come up for a vote someday. At least it wasn't tabled in committee.

Finally getting a definitive answer on the estate tax is something every estate planner is looking for. I was at an estate planning class earlier today and heard some of the top estate planning lawyers in this county say that they don't know what to do next. Several of them have written letters to their clients about the estate planning problems that we now face, but none of them have actually mailed the letters. We are all concerned about upsetting clients over a problem that seems real this week, but could disappear as soon as the Senate passes a bill such as H.R. 4154.

Which Way Will It Go?

Congress has several options available as it considers the federal estate tax:

1. Extend the $3.5 million exclusion on a permanent basis, and also make the law retroactive to Jan. 1. Although Sen. Baucus has advocated this approach, Rep. Rangel, chair of the House Ways and Means Committee, is now backing off of retroactivity. In any event, a retroactive law is a guarantee of litigation that will leave estate planning up in the air for years.

2. Extend the $3.5 million exclusion, but don't make it retroactive. This is what Rep. Rangel is talking about, and since he's chairman of the House Ways and Means Committee, it could stand a chance. Much less chance of litigation, although a few estates will slip through and never be taxed. But that's the chance the Senate took when it went home on Dec. 24 without voting on the estate tax.

3. Do either 1 or 2 above, but insert your favorite number for an exclusion amount. A popular substitute has been $5 million.

4. Take no action and allow all of 2010 to roll by without any estate tax, and go into 2011 with only a $1 exclusion and a 55 percent maximum tax. This is the default situation, and we'll get there if Congress does not take action. There are pros and cons for each party: The Republicans get a full year of repeal, but 2011 brings a much harsher estate tax. The Democrats have to put up with a full year of repeal, but in 2011 they get a new revenue source that could help balance the budget. And, even better, no one is on record as having voted for it! It's harder to be criticized for a non-vote that increases taxes than an actual vote for increasing taxes.

Whatever happens, one thing seems to be sure: It won't happen soon because the health care bill has to be decided first.