Estate tax future unclear

Planning for the federal estate tax has been a challenge for many years. Observers have been confident that Congress will change the rules soon, but no one can say what the future tax burden will be. Among the questions that my clients face are how much life insurance to buy to help pay the tax and how to arrange policy ownership.

Early in this decade, the law was changed to reduce the tax by increasing gradually until the year 2010 the amount of property exempt from the tax (the “exclusion equivalent”). Then, the current law calls for the tax to disappear in 2010, only to reappear in 2011 with a drastically reduced exempt amount.

It once was hoped that the 2010 demise of the tax would be made permanent before 2011. But in this era of record deficits and record-setting public debt, that is not going to happen.

Wise planners saw the reappearance of the tax coming. But no one, not even lawmakers, has known what would be the details of the renewed tax. So, no one has known how to plan.

There are at present three bills under consideration. Among the major differences in the three are the following details:

SB722, introduced by Sen. Max Baucus (D-Mont.), would keep he exempt amount at its current level of $3.5 million per person and would keep tax rates where they are now (18 percent to 45 percent). This bill would increase the exempt amount for inflation.

HR 2032, sponsored by Rep. Jim McDermott (D-Wash.), would permanently set the exempt amount at $2 million but allow it to rise with inflation. Tax rates for this bill start at 45 percent, go to 50 percent for assets in excess of $5 million, and top out at 55 percent for amounts above $10 million.

HR 436, offered by Rep. Earl Pomeroy (D-N.D.), would freeze the exempt amount and the tax levels at the present levels.

With all the other important topics under consideration by Congress, many commentators do not believe that a permanent fix for the federal tax will emerge anytime soon. They see healthcare reform, cap and trade, the deficit, and nuclear proliferation consuming lawmakers’ attention.

By the same token, they do not expect the tax to disappear, even temporarily, in 2010, as the current law calls for. Rather most observers expect that the present exempt amount and the present tax rates will be extended for at least one more year. Presumably, Congress will have more time next year to take more permanent action.

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