Political pundits are busily engaged in handicapping the impact of the recent election results on Congressional activity in general. What does it mean for estate tax reform in particular? Suffice it to say, prognosticating estate tax reform has so far proved to be a nine-plus year-long game of “pin the tail on the donkey.” But against that caveat, what might it mean? On the one hand, if a patch, let alone reform, couldn’t be passed while the Democrats controlled both sides of Congress, it’s difficult to see how split control of Congress bodes well for action. On the other hand, perhaps the Democrats, in this lame duck session, may be more motivated to get something done before they lose control of the House. Clearly the two-year patch of the 2009 system would be easiest, as Congress has already voted for an exemption from the pay-go rules for such a patch. Retroactivity becomes a big issue in that case, however, with one of the two years nearly gone. No one who died in 2010 truly counted on, when doing his planning, a certainty or even likelihood that there would be no estate tax in 2010. But as the length of time that transpired since temporary repeal occurred makes mandatory retroactive application feel less and less equitable—optional retroactivity (to trade basis step-up for estate taxation) seems to hold greater appeal. Of course, this would shift the responsibility (and attendant liability) from Congress to the executor to decide which set of rules causes whom to get what; the executor would likely then have the rare privilege of choosing which rules to apply and incurring the wrath of whichever beneficiaries would have done better under the other set of rules.
But with so little time left for a lame duck Congress to act this year, and with the desperate need to raise revenues, what better way to make a dent in the deficit than for Congress to sit on its hands and allow the 2001 version of estate and generation-skipping transfer (GST) taxes to reappear on Jan. 1, 2011? The prospect of 55 percent estate tax rates and only a $1 million exemption might prove to be the most powerful incentive for meaningful reform. It would have the appeal of re-harmonizing the various state estate tax systems by restoring the credit for state death taxes and of making the unified credit (the only true problem with the pre-2001 version of our transfer tax system—as the amount of the unified credit was simply too small) actually "unified" again, thereby highlighting and hopefully making it easier to address. It would leave estates of decedents who died during 2010, however, with the unadministrable nightmare of carryover basis (especially with respect to negative basis assets). The great irony is that given (1) the number of billionaires who died estate tax-free in 2010, and (2) the veritable tsunami of tax-free distributions that will be made at year-end out of trusts that are temporarily exempt from GST taxes this year, Congress will have permitted billions upon billions of dollars of revenues to slip through its fingers through its nearly decade-long hibernation on the subject. Sadly, it’s too late for there to be any good options—only options that are “less bad” than others stand a chance. So whatever happens, it will almost certainly remain politics as usual, instead of being policy-driven.
