Let's look at the recent past, the better to see what the future of the estate tax will be in the years 2009, 2010, 2011 and beyond.
My predictions about what we can expect are based on the Nov. 14, 2007 Senate Finance Committee (SFC) hearing; additional questions after that hearing submitted by the senators for inclusion in the hearing record; and two additional SFC hearings this year. Toss in a recent Senate budget resolution and taking a peek at unsuccessful amendments to that resolution, I'm prepared to go out on a limb and predict where the Senate is headed. And where the Senate goes, the House will follow.
Bottom line: The law scheduled to take effect in 2009, and only for that year, will be made permanent — that is to say, there will be a $3.5 million exemption ($7 million for a couple) with a top tax rate of 45 percent. Current law allowing special-use valuation for farms and ranches and stretched-out estate tax payments for qualifying small businesses, farms and ranches will be liberalized.
The gift and estate tax exemptions once again will be unified. And if there is enough dough under the pay-as-you-go (pay-go) rule (or it's tossed out the window, as is often the case), the estate tax exemption will be increased to $5 million ($10 million for a couple) with a top rate of 35 percent. But because of the relationship Congress has with the printing and timber industries, the exemption above $3.5 million and the rates below 45 percent would be phased in — ever so gradually. An alternative to phasing in a higher exemption would be to index it for inflation. Will the state death tax credit of yesteryear be restored? That, too, will depend on pay-go or its being disregarded.
The unlimited gift and estate tax charitable and marital deductions will remain, as well as the special gift and estate tax marital rules for alien spouses (not be confused with alienated spouses, who may well be Americans). And the $12,000-per-donee annual gift tax exclusion (indexed for inflation) will remain.
A penultimate prediction: it's said that the meek shall inherit the earth, and they shall do so with a stepped-up basis. Thus, the carryover-basis rule scheduled for 2010 won't be included in the brand new law.
And, finally, except for one possible important change, the rules won't be simplified.
What is that change — a change that will make estate planning easier, less complicated and less costly for moderately wealthy married couples?
The answer is portability of the estate tax exemption. More about that later. First, here's an overview of the three recent estate tax revision hearings that have led me to these conclusions:
- Nov. 14, 2007 hearing
Four invited witnesses testified. I was among them. The hearing was titled “Federal Estate Tax — Uncertainty in Planning Under the Current Law.” But the hearing's title doesn't give the major story. True, a good part of the hearing covered the uncertainty and the complexity under current law. But a better title would have been: “Should the Estate Tax Be Permanently Repealed? And, If Not, What Should Be the Exemption and the Rates?”
A major topic at the hearing was the tax-or-no-tax issue. It was well framed by three of the witnesses. Investor Warren Buffett argued for retention of the estate tax with a $4.5 million exemption (indexed for inflation) and gradually increasing rates that would go beyond the current 45 percent top rate. Businessman Eugene Sukup urged absolute repeal. Rancher Dean Rhoads said, in effect, that he could live with (die with?) an exemption of $4 million to $5 million (double that for a married couple.)
My charge as the sole estate-planning lawyer at the hearing was not to talk about whether there should or shouldn't be an estate tax (and if so, with what exemptions and rates), but to discuss the complexities in planning under current law (changing exemptions, estate-tax interruptus and resurrection).
Here's how I concluded my opening statement: “Thanksgiving is just around the corner. Every year my family has a marathon Monopoly game — over the entire holiday weekend. This year, to make the game more realistic for my grandchildren, I've indexed the game for inflation. If you buy Park Place, it will cost you $5 million. The card that formerly said ‘Pay Tax Collector $200’ will now say: ‘Pay $20,000 if you land at 7 o'clock or 8 o'clock; pay $15,000 if you land at 9 o'clock; and pay nothing at all if you land at 10 o'clock. But if you land at 11 o'clock or later, pay $40,000.’
“That's analogous to the changing estate tax exemption over the next couple of years, complete repeal of the tax in 2010, but a return of a $1 million exemption in 2011 and beyond.
“My version of the rules will surely make our Monopoly game more interesting. But our nation's estate tax rules shouldn't be a roll of the dice!”
That prompted SFC Chairman Max Baucus (D-Mont.) to ask me, “Are you going to issue additional money?”
My response: “Like the government, we'll print it.”
I left the hearing with the strong belief that even the committee's strongest advocates for estate tax repeal acknowledged that repeal isn't in the cards. Thus, the real issues are the size of the exemption and the rates. At this hearing and the two subsequent hearings, senator after senator from both parties spoke about the importance of an estate tax law that would preserve family businesses, farms and ranches.
As is often the case, committee members follow up on a hearing by submitting additional questions to the witnesses. The questions and answers then are included in the printed record. The questions frequently reflect the senators' viewpoints and are asked not only to receive answers but also to make points.
The questions asked of me raised both technical and practical issues. They included topics such as: proposed new beneficial rules for estates of business owners, farmers and ranchers; estate planning delay awaiting congressional action; the cost of estate planning; special-use valuation for farms and ranches, qualifying for payment of estate tax in installments; life insurance; and a possible bipartisan compromise.
On the compromise issue, here's what Senator Chuck Grassley (R-Iowa), the ranking member on the committee, asked — and my response.
Grassley: “Mr. Teitell, as you have seen from the House and Senate debate over the last few years, there is a sharp division on what our long-term estate tax policy ought to be. There is a bipartisan group who would like to, at a minimum, ensure that the estate tax does not rise above the level set in 2009. The resistance to estate tax reform resides in the leadership of the House and Senate majorities. If the Democratic leadership agreed that, at a minimum, the estate tax would not rise above 2009 levels, would that provide clarity to estate planners like yourself? That is, clarity for the period between now and the time long-term estate tax relief is enacted?
Teitell: “Mr. Ranking Member: I am sure that taxpayers and their advisors would salute members of Congress who reach a compromise so certainty will reign for the foreseeable future.
“With all due respect to members of both parties, the mood of the country on this issue — based on what I hear at my lectures on estate planning to professional advisors and laypeople across the country and my discussions with fellow professionals at estate-planning conferences — is that people are fed up with the Congress's inability to resolve this issue.
“The present Congress can't, of course, by public statement or legislation, guarantee what a future Congress will do. But for now, passage before the summer recess of a revised estate tax law with a $3.5 million exemption (the 2009 exemption and rates alluded to in your question) would cure the current planning paralysis. The planning techniques sanctioned under current law — as well as the unlimited marital and charitable deductions — should be retained.”
- March 12, 2008 hearing
Entitled “Alternatives to the Current Federal Estate Tax System,” the committee heard testimony from three law professors (two from the United States and one from Canada) about possible substitutes: an inheritance tax; an accessions tax; and an income-inclusion system. This was a fascinating hearing. As expected, the professors were knowledgeable and articulate.
Senators Baucus, Grassley and Blanche Lincoln (D-Ark.) were especially interested in how small businesses, farms and ranches would be treated under the proposed alternative tax systems. That was their overarching concern. Unfortunately, the hearing was not well attended by SFC members. Presumably the absentees will read the detailed and scholarly written statements submitted for the record by the three stellar professors: Lily Batchelder of New York University School of Law in New York; Joseph Dodge of Florida State University, College of Law in Tallahassee, Fla.; and David Duff of the University of Toronto, Faculty of Law, in Toronto, Canada.
I won't take your time by discussing the alternative tax systems explored at the hearing because they don't have a snowball's chance in summertime Washington. If they are enacted, I'll resign from the Nostradamus Estate Tax Society.
- April 3, 2008 hearing
It had a catchy title — “Outside the Box on Estate Tax Reform: Reviewing Ideas to Simplify Planning” — but the hearing actually dealt with rearranging and modifying things already in the box. As for simplification, one proposal dealing with portability of spouses' estate exemptions would simplify planning for many couples and makes great sense.
The SFC heard from four witnesses — all shining lights — who have extensively studied and written about the topics the senators asked them to cover:
Dennis Belcher is a partner at McGuire Woods LLP in Richmond, Va., chairman of the American Bar Association Task Force on Federal Wealth Transfer Taxes and President-Elect of the American College of Trust and Estate Counsel (ACTEC). He praised the special use valuation of farms and ranches and estate tax installment payment options under current law and made numerous practical suggestions for improvement.
Shirley L. Kovar is a shareholder at Branton & Wilson, APC, in San Diego, and chair of ACTEC's Transfer Tax Study Committee. She discussed proposals that would allow an individual to inherit, then use the unused estate tax exemption of his spouse. This is what is meant by portability. Planning would be simplified in many cases by obviating the need for credit-shelter trusts and transfers of assets between spouses to equalize their estates. In my view, this was one of the most important topics covered at the three hearings.
Roby B. Sawyers is a professor in the Department of Accounting at North Carolina State University, and a representative of the American Institute of Certified Public Accountants (AICPA). He supported unifying the estate and gift tax exemption amounts (the way it used to be.)
Diana Aviv is president and chief executive officer of Independent Sector, in Washington. She discussed transfer taxes as they relate to charitable giving — testifying about the importance of charities and how lowering the rates and increasing the exemption would decrease charitable bequests.
- Show me the money
The Senate budget resolution for fiscal year 2009, passed on March 14, is, of course, a goal and not the law — but nevertheless it's significant for those of us who read tea leaves. SFC Chairman Baucus' amendment to the Senate budget resolution was the only estate tax amendment to pass. It would make the 2009 law permanent — a $3.5 million exemption ($7 million per couple) with a 45 percent rate. It was approved 99-1. Trivia fans: Sen. Russ Feingold (D-Wis.) was the lone dissenter.
Five other amendments were offered but not passed. The votes on the one successful amendment and the amendments manqués could foretell the bill that the Senate will eventually pass:
The Graham amendment with its exemption per couple of $15 million and a 35 percent rate was rejected by a vote of 47 to 52.
The Kyl amendment with an exemption $10 million per couple and a rate starting at 15 percent and ending with a top rate of 35 percent was rejected 50 to 50.
Another Kyl amendment would protect, according to Sen. Jon Kyl (R-Ariz.), small businesses, family ranches and farms by providing a $5 million exemption, a low rate for smaller estates and a maximum rate no higher than 35 percent. This was rejected 48 to 50.
The Salazar amendment with an exemption of $10 million per couple and a rate of 35 percent was rejected 38 to 62.
The Landrieu amendment with an exemption of $10 million per couple and a 35 percent rate and a small surcharge for large estates and several special tax breaks for small businesses and family farms was rejected 23 to 77.
Reminder: these days, it takes 60 votes to pass tax legislation in the Senate.
So when will the new estate tax law be enacted? Baucus and Grassley say that they'd like to get the law enacted this year. But the rule for legislation is later, rather than sooner.
That's why I predict, uh … guess, passage in 2009. When in that year? By June, by Jove.
One final note to estate tax junkies: go to www.trustsandstates.com to view the witnesses' written statements for the hearing on Nov. 14, 2007, and follow-up senators' questions and my answers, plus the witnesses' written statements for the March 12 and April 3, 2008, hearings.
Conrad Teitell is a principal at Cummings & Lockwood in Stamford, Conn.