The Future of Federal Estate Tax

As of February of 2010, the United States enjoyed more than a month of complete repeal of the federal estate tax. Before its repeal, the federal estate tax was almost as old as the U.S. income tax which required the 16th Amendment to the U.S. Constitution to adopt.

The 2010 repeal of the federal estate tax was originally enacted in 2001 – a much different time with respect to our country’s political and economic climate. This 2001 legislation was strange because it included a feature whereby the federal estate tax would be “re-enacted” in 2011 after full repeal in 2010. With the then Republican dominance in Washington, D.C., many believed that the complete and permanent repeal of the federal estate tax would be accelerated at a date prior to 2010. However, after a number of attempts to repeal the estate tax after 2001, which required a 60-vote margin in the U.S. Senate to pass, the estate tax remains in effect.

Throughout the current year, many expected the Democrat-controlled federal government to pass and sign legislation that would have kept the federal estate tax alive in 2010 and beyond. Although Congress was preoccupied with the health care debate, there were a number of opportunities to make changes to the 2001 law to prevent repeal of the federal estate tax from happening on January 1, 2010; however, all to no avail.

At the present time, estate planning is particularly challenging from an estate planner’s perspective even though the federal estate tax is technically repealed. Some still believe that Congress will still act this year to eliminate the 2010 repeal of the federal estate tax. However, if Congress does nothing this year, the federal estate tax will be resurrected on January 1, 2011. Unfortunately, if the federal estate tax is resurrected without congressional action this year, it returns to the 2001 tax rate and tax levels. This represents a massive tax increase to 55% on assets over one million dollars when compared to the federal estate tax as it existed on December 31, 2009, which was 45% estate tax on assets in excess of three million five hundred thousand dollars.

Others believe that Congress will take some action this year to retroactively reinstate the federal estate tax; although there is an argument that a retroactive application of federal tax law would be unconstitutional (such an argument has not been upheld by the U.S. Supreme Court in other federal tax matters). Another view is that Congress will take no action until the mid-term elections in November and if Republicans retake control of Congress this November, it is possible that the federal estate tax will remain repealed for the entire year 2010, with some type of reintroduction in 2011. So as the saying goes: “Stay tuned for further developments…”.

Tarta Law Firm NJSteven W. Tarta, Esq. brings more than 45 years of professional experience to his practice, with a sophisticated focus on Estate Tax Planning, Living Trusts and Elder Law.

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