December 31, 2009
Re:
2010 Estate Tax Repeal
INTRODUCTION: Federal legislation enacted in 2001 enacted many changes to the
transfer tax system. That legislation gave us the current estate and generation-skipping transfer
(GST) exemptions of $3.5 million, and a marginal tax rate of 45%. Most famously, the 2001
legislation repealed the estate and GST taxes (but not the gift tax) for 2010. The 2001 legislation,
however, also included a "sunset" provision eliminating all of these transfer tax changes at the
end of 2010. Unless Congress acts, the estate tax exemption will drop to $1 million in 2011, and
the top estate, gift and GST tax rate will return to 55% (60% for some transfers subject to tax).
In December 2009 the House of Representatives passed H.R. 4154, permanently
extending the 2009 estate and GST tax rates and exemption amounts. The more closely divided
Senate did not act, proving yet again that the House is nearly irrelevant to wealth transfer tax
reform. The one-year repeal originally enacted by Congress in 2001 begins on January 1st and
the two taxes will hibernate in 2010. In an election year, hardly a Representative or Senator up
for re-election wants to go on record as having voted to re-institute a tax. The ultimate irony
may be that if Congress fails to act, the estate tax will return automatically in 2011 to a 55% rate
and $1 million exemption.
COMMENT: If history offers any lessons, rumors of the demise of the estate tax are
greatly exaggerated. The first estate and generation-skipping transfer tax returns for 2010
decedents will be due next October (April 2011 if an estate takes a six-month extension or the
GST tax is reportable on a gift tax return). Congress could restore these taxes retroactively by
acting at any time before then. Alternately, it could restore the tax prospectively and allow some
transfers to escape tax free.
The sooner Congress acts the more likely it is that any change would be retroactive. As
2010 progresses, the chances increase tha