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Speculating on the Future of the Federal Estate Tax
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From the Desk of Janet L. Barr,ChFC, CLU
What's the future of thefederal estate tax? All weknow is that no one knowsfor sure; it's all speculation.So, let's take a look atwhat could happen. Thereare five possibilities: (1)Congress could extendcurrent tax law (commonlyreferred to as the "Bush tax cuts"); (2)Congress could do nothing, essentially turningthe calendar back to 2001; (3) Congress couldcompromise, agreeing on something betweenthe 2001 tax rules and the rules that apply in2012; (4) Congress could enact new estate taxreform; or (5) Congress could repeal the estatetax altogether.
Only a few of the estate tax laws that are affected are discussed here.
Congress could extend current tax lawagain, probably for two years
That would mean the top gift and estate tax ratewould remain at 35%. The generation-skippingtransfer (GST) tax (this is an additional taxthat's imposed on transfers to beneficiaries whoare two or more generations below you) wouldalso remain at a 35% tax rate. The gift andestate tax exemption (may also be referred toas an exclusion) would remain at $5,120,000(plus any adjustment due to inflation) plus anydeceased spousal unused exclusion amount(DSUEA).The DSUEA is the amount of the gift and estatetax exemption that the first spouse to die doesnot use. This amount can be transferred fromthe estate of the first spouse to die to thesurviving spouse. This is referred to asportability. Portability would remain.The GST tax exemption of $5,120,000 plus anyadjustment due to inflation would remain. Thereis no DSUEA for the GST tax (i.e., the GST taxexemption is not portable between spouses).The smart money is on this possibility. It hasbeen Congress's tendency of late.
Congress could do nothing
Congress could allow all or some of theprovisions that sunset to expire, reverting to the2001 tax rules. The top gift and estate tax ratewould be 55% with a 5% surtax on estates thatexceed $10 million but do not exceed$17,184,000. The GST tax rate would also be55%. The gift and estate tax exemption wouldbe $1 million. And, the DSUEA would no longerapply. The GST tax exemption would be $1million indexed for inflation (estimated so far tobe $1,360,000).Some analysts have proposed letting the Bushtax cuts expire as part of a plan to balance thebudget over time.
Congress could compromise
Congress could pass a compromise bill thatwould set the top tax rate to 45% and theexemption amount to $3.5 million. Whetherportability would expire or be extended isanyone's guess.President Obama supports this option. His2013 budget plan would return the gift andestate tax, and the GST tax, to 2009 levels; thetop tax rate would be 45%, the exemptionswould be $3.5 million (but only $1 million for gifttax purposes), and portability would be madepermanent.
Congress could enact estate tax reform
Many believe that permanent andcomprehensive estate tax reform is needed.However, the political landscape is probably notcurrently amenable to this option. Besides,permanent tax reform does not really mean thatit will be permanent (it could, of course, bemodified or repealed by future legislation).
Congress could repeal the estate taxaltogether
The arguments for and against the repeal of theestate tax continue to wash in, like oceanwaves. The tide was high for repeal a few yearsback, but the current economic and fiscalsituation may have slowed its momentum, andthe tide seems to be ebbing.
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