Over the past few weeks the federal estate tax has become a sticking point for members of Congress. While the Democrat-controlled Senate voted to extend the Bush-era tax cuts for everyone except single filers earning above $200,000 and joint filers earning above $250,000, the estate tax provisions which would have brought back the 2009 exemption and rate were stripped from the bill prior to the vote. On the other side, the Republican-controlled House voted to extend all of the Bush-era tax cuts and the current $5.12 million estate tax exemption and 35% estate tax rate. Congress then promptly adjourned, leaving the tax situation unresolved. This was certainly not surprising to anyone, but what has become clear, at least with regard to the estate tax, is that three distinct groups have emerged:
- The Extenders - those who want to extend the current $5.12 million estate tax exemption and 35% estate tax rate. This group is comprised of Republicans as well as Democrats from agricultural states. They believe that the current exemption and rate are good for the economy and will prevent small businesses from having to be sold to pay the estate tax bill. A subgroup of the Extenders is the Repealers, who would really like to see the estate tax completely repealed but do not believe that they can garner enough votes to make it stick, so they will side with the Extenders for now and work towards repeal in the future.
- The Conformers - those who want to reinstate the 2009 estate tax exemption of $3.5 million and 2009 estate tax rate of 45%. This group is comprised of Democrats who have allied themselves with President Obama, who has supported the 2009 numbers as far back as his campaign days in 2008. They believe that the $5.12 million exemption is a bit too high and the 35% estate tax rate is a bit too low and the 2009 numbers are a good middle-of-the-road solution.
- The Reverters - those who want the estate tax exemption and rate to revert back to the laws that went into effect in 2001, which would result in a $1 million estate tax exemption and 55% estate tax rate. This group is comprised of Democrats who believe that the $4.12 million increase in the estate tax exemption over a decade is just too much and the 2001 estate tax rules are fair and equitable.
These three groups with very different opinions and views about the federal estate tax have led those who are closely watching the estate tax debate - the Watchers - to wonder what will be the end result. Of course, the Watchers have been here before - at the end of 2009 and then again at the end of 2010 - when Congress and President Obama did two highly unanticipated things: first let the estate tax be repealed, and then significantly increased the estate tax exemption by $1.5 million. Both of these things were temporary, although one was by default and the other was by deliberate action. And yet here we are again, knocking on the door of another year with the temporary "fix" set to expire, and what is expected is that the Extenders will win in the end, which will result in a one-year extension of the 2012 estate tax laws. Assuming this happens - remember, what happened in 2009 and 2010 was not expected - then at first everyone will breathe a sigh of relief and most will be happy - except for the Reverters and some of the Conformers - but then it will sink in. Another temporary "fix" is the very last thing that we need since it will only serve to prolong the uncertainty that has surrounded planning - including estate planning, financial planning, business planning, and tax planning - for the past 11 years. And the Watchers will then be watching yet again as we approach 2014 - same thing, different year.