Fuzzy Future of the Federal Estate Tax

Estate planning advisors & fiduciary administrators know much about the previously legislated phase-up of the federal estate tax. But will those FET changes become a permanent phase-out as originally contemplated?

Speculation, consternation, and even humor run rampant in discussions among lawyers & advisors about the future of the FET. A vision of the FET's future has been very fuzzy indeed, due to the continuing Congressional political stalemate despite constant pressure from a Republican Administration.

Wikipedia's entry on "Effects of the Debate" simply states the FET's status through 2006:

Since 2003, the top rate has been lowered from 49% by one percentage point per year; in 2006 the top rate was 46%. If the US Congress makes no changes to US tax law, the top rate will continue to drop by one percentage point per year until 2009 when the top rate is scheduled to be 45%; in 2010 all estates will be taxed at 0%; and in 2011 the estate tax will return at a top rate of 55%.

Most experts expect that Congress will change the tax law before then. If the estate tax is eliminated, then unrealized capital gains would be subject to capital gains tax in order to justify the step up in basis in the hands of the new owner.

Legislation to extend raising the unified credit (beyond year 2010) of the estate tax has passed the House of Representatives. It also passed in the Senate in June, 2006. Later when the conference committee added it to a bill to increase the minimum wage, the combined bill failed to garner 60 votes to invoke cloture in the Senate, and it failed to pass legislation to extend raising the unified credit (beyond year 2010) of the estate tax has passed the House of Representatives. It also passed in the Senate in June, 2006.

Later when the conference committee added it to a bill to increase the minimum wage, the combined bill failed to garner 60 votes to invoke cloture in the Senate, and it failed to pass. * * *

Then, in July, 2006, the New York Times reported that the Bush Administration unilaterally had ordered staff cuts of qualified IRS FET auditors "because far fewer people were obliged to pay estate taxes under President Bush’s legislation." See: "I.R.S. to Cut Tax Auditors", by David Cay Johnson, published July 23, 2006:

The federal government is moving to eliminate the jobs of nearly half of the lawyers at the Internal Revenue Service who audit tax returns of some of the wealthiest Americans, specifically those who are subject to gift and estate taxes when they transfer parts of their fortunes to their children and others.

The administration plans to cut the jobs of 157 of the agency’s 345 estate tax lawyers, plus 17 support personnel, in less than 70 days. Kevin Brown, an I.R.S. deputy commissioner, confirmed the cuts after The New York Times was given internal documents by people inside the I.R.S. who oppose them. * * *

Such personnel cuts were accomplished by mid-winter, 2007. See: "IRS Cuts Estate Staff As Returns Slow" (03/05/07), posted by the New York State Society of CPAs, which summarized an Associated Press article published March 2, 2007.

The Internal Revenue Service completed a round of job cuts in recent weeks that thinned nearly 100 employees from its group overseeing gift- and estate-tax returns, The Associated Press reported Friday.

The move was intended to keep pace with a shrinking number of estate-tax returns, according to the IRS, which promises to scrutinize estate-tax cases with the same care it has used in the past, the AP reported.

But some tax attorneys say the staff reduction will stretch the agency thin and may result in fewer or less-accurate audits. They're concerned about the agency's plans to handle more estate-tax audits using IRS attorneys in states far from where the audits were filed, the AP reported. * * *

Professor Gerry Beyer reported on the Wills, Trusts & Estates Prof Blog on May 14, 2007, in his posting entitled "2010 - An Estate Tax Odyssey", that two of the foremost estate & tax planning attorneys in the country (my characterization) actually had contemplated seriously the effects of no change in the scheduled FET phase-out:

Jonathan G. Blattmachr (partner, Milbank, Tweed, Hadley & McCloy, LLP, New York) and Michael L. Graham (The Graham Law Firm, Dallas) have recently published their article entitled Thinking About the Impossible for 2010: No Estate Tax and Carryover Basis, Probate & Property, May/June 2007, at 12.

Here is the conclusion of their article: Although most would probably place the chances at less than 50% that the year 2010 will bring a repeal of federal estate ax and its companion carryover basis, it is far from impossible. It seems prudent to plan for repeal of federal estate tax and carryover basis now by having a decedent's estate planning documents structured to maximize flexibility and savings. * * *

Others, instead, were dealing with the continuing uncertainty & helplessness through humor. See: "2010 Brochure on Advanced Estate Planning", posted on March 23, 2007, by Professor Beyer; and a Wall Street Journal article, entitled "Estate tax humor plays on foggy future", by Arden Dale of Dow Jones News Service, published on April 9, 2007 & reposted in full online by (among others) The Repository (Canton, OH).

“We can help! Our team of experts will guarantee that you pass away in 2010 and avoid federal estate tax.”

Gallows humor about estate taxes — like this Internet spoof — is in vogue these days because changes in the so-called death tax have left even savvy financial planners puzzled. Meanwhile, the hope of a total repeal is now dim because of the shift in power to Democrats in Congress. * * *

A boom in trusts -- meant to reduce or avoid the gift tax -- has been one result of the fog. People once willing to whittle down their taxable estates by giving away money to friends and family now aren't so willing. The logic: Don't give away money if the estate tax is about to be repealed. * * *

Yesterday, while reading a well-documented, up-to-date report made available to the members of the American College of Trust & Estate Counsel (ACTEC), I thought that the FET's fuzzy future became just a bit more focused.

Ronald D. Aucutt, Esq. -- a past President of ACTEC, a lawyer with indisputable credentials & recognitions, and an author -- wrote an excellent analysis, filled with weblinks, about recent Congressional attention on the very fuzzy future of the federal estate tax, in the setting of negotiations on a 2008 Fiscal Year supplemental budget appropriation.

With his express permission (in exchange for my gratitude & your learning), I repost his article (while he & his law firm, McGuire Woods, LLP, retain full copyright).

Does your vision of the FET's fuzzy future clear up just a little bit, too, after you read Ron's report?

FEDERAL ESTATE TAX IN THE FISCAL 2008 BUDGET RESOLUTION

We dare not take our eyes off Congress for a minute! No sooner was Capital Letter Number 3 (May 7, 2007) posted to the website, but Congress took the subject matter of that Capital Letter to another level of interest and attention.

On May 9, 2007, when the Senate was considering the appointment of Senators to the House-Senate conference on the Fiscal Year 2008 budget resolution, Senator Jon Kyl (R-AZ) offered the following motion:

That the conferees on the part of the Senate on the disagreeing votes of the two Houses on the concurrent resolution S. Con. Res. 21 (the concurrent resolution on the budget for fiscal year 2008) be instructed to insist that the final conference report include the Senate position to provide for a reduction in revenues, sufficient to accommodate legislation to provide for permanent death tax relief, with a top marginal rate of no higher than 35%, a lower rate for smaller estates, and with a meaningful exemption that shields smaller estates from having to file estate tax returns, and to permanently extend other family tax relief, so that American families, including farmers and small business owners, can continue to enjoy higher after-tax levels of income, increasing standards of living, and a growing economy, as contained in the recommended levels and amounts of Title I of S. Con. Res. 21, as passed by the Senate.

153 Cong. Rec. S5838 (daily ed. May 9, 2007).

In explaining the motion, Senator Kyl said: “While the motion does not specify that amount, an exemption of $5 million per estate indexed for inflation is what is contemplated.” Id. at S5839.

Senator Kent Conrad (D-ND), the chairman of the Senate Budget Committee, opposed the Kyl motion, on the grounds that it was not paid for and that the subject was already covered by the Baucus amendment (discussed in Capital Letter No. 3), which he as a Senate conferee would be committed to support. Id.

Nevertheless, Senator Kyl’s motion passed by a vote of 54-41, with eight Democrats in favor and no Republicans opposed. The binding effect of such a motion to “instruct” conferees, however, is unclear. Even provisions “sufficient to accommodate” the desired legislation would still leave the implementation up to the tax-writing committees.

Then on May 17, 2007, the House and Senate approved the budget resolution with intriguing references to the estate tax. The provisions of the budget resolution applicable to the House of Representatives (section 303(b)(2)) permit

one or more bills, joint resolutions, amendments, motions, or conference reports that provide for tax relief for middle-income families and taxpayers and enhanced economic equity, such as extension of the child tax credit, extension of marriage penalty relief, extension of the 10 percent individual income tax bracket, modification of the Alternative Minimum Tax, elimination of estate taxes on all but a minute fraction of estates by reforming and substantially increasing the unified credit, extension of the research and experimentation tax credit, extension of the deduction for State and local sales taxes, and a tax credit for school construction bonds … provided that such legislation would not increase the deficit or decrease the surplus for the total over the period of fiscal years 2007 through 2012 or the period of fiscal years 2007 through 2017. H.R. Rep. No. 110-153, 110th Cong., 1st Sess. 27 (2007).

With respect to the corresponding language of the budget resolution applicable to the Senate (section 303(a)), an overview prepared by the staff of the Senate Budget Committee stated:

The Conference Agreement supports middle-class tax relief, including extending marriage penalty relief, the child tax credit, and the 10 percent bracket subject to the pay-as-you-go rule. It also supports reform of the estate tax to protect small businesses and family farms. House provisions include additional procedural protections to help ensure fiscal responsibility.

The proviso that the contemplated tax relief “not increase the deficit or decrease the surplus for the total over the period of fiscal years 2007 through 2012 or the period of fiscal years 2007 through 2017” – what the Senate Budget Committee’s overview refers to as “procedural protections to help ensure fiscal responsibility” – can fairly be interpreted to mean that under the budget resolution the Ways and Means Committee will not include any tax relief provisions that are not “paid for” through increases of other taxes or projected budget surpluses.

This will be an especially hard standard to meet in view of the current deficit that the budget needs to overcome and the commitment of Ways and Means Committee Chairman Charlie Rangel (D-NY) and other Members of Congress to give priority to the very expensive task of fixing the individual alternative minimum tax.

Hence, no legislation is guaranteed by these provisional actions and statements. But “our” tax – the estate tax – has certainly received more attention in the first five months of the 110th Congress than most of us would have predicted.

For an even more extensive analysis about the FET's future, also written by Ron, offering greater background & wider options, see the article publicly posted on his law firm's website, entitled "Congressional Clues about The Future of The Estate Tax" (05/21/2007).

Update: 06/01/07:

I noticed a cross-link to this PA EE&F Law Blog entry, posted on the home page of Leimberg Information Services, as follows:

Blog post by Pennsylvania attorney Neil Hendershot cites resources on the future of the federal estate tax, including the full text of a commentary by Ronald Aucutt entitled "Federal Estate Tax in the 2008 Budget Resolution."

Update: 03/11/07:

For updates, since the date of this posting, on the topic of Congressional consideration of revised wealth transfer tax legislation, see: PA EE&F Law Blog postings:

• "US Senate Fin Cte to Hear FET Alternatives" (03/11/08)
• "CRS Summarizes Seven FET Proposals" (03/03/08)
• "Joint Tax Cte's Report & Hearing on Federal Estate Tax" (11/14/07)
• "Fed Est Tax Reform Bill Introduced" (08/16/07).

For related postings on this Blog about Congressional reconsideration of wealth transfer taxes, see articles under the label "Federal Estate Tax".