While we know what the federal estate tax rules will be for 2012, what will happen in 2013 and beyond is really up in the air. Under current law the estate tax exemption is scheduled to drop significantly from $5,120,000 in 2012 to $1,000,000 in 2013, and the estate tax rate is scheduled to jump from 35% to 55%.
That’s right – while the federal estate tax exemption was set at $5,000,000 and the estate tax rate was set at 35% for the 2010 and 2011 tax years, and the exemption increased to $5,120,000 for 2012, on January 1, 2013 the exemption and rate are scheduled to revert back to the numbers that were in effect in 2001/2002 - meaning, as mentioned above, a $1,000,000 estate tax exemption and 55% estate tax rate.
But with Republicans having taken over a majority in the House of Representatives and gaining significant ground in the Senate, what will be the future of the federal estate tax in 2013 and beyond?
Will Anything Happen With the Estate Tax Before the End of 2012?
During the months preceding the 2008 election, then Senator Obama was against full repeal of the federal estate tax and instead favored a $3,500,000 exemption and 45% tax rate, which happen to be the exact same numbers that took effect in 2009. (For the sake of comparison, John McCain favored a $5,000,000 exemption and 15% tax rate). In fact, during his campaign, Obama supported making the 2009 numbers permanent in 2010 and beyond.
Nonetheless, in early December 2010 President Obama and Senate Republican leaders reached an agreement on the estate tax rules for 2010, 2011 and 2012. Under the provisions of the Tax Relief Unemployment Insurance Reauthorization and Job Creation Act of 2010 ("TRUIRJCA" for short), the estate tax exemption was set at $5,000,000 for 2010 and 2011, indexed for inflation in 2012 which resulted in the current $5,120,000 exemption, and the estate tax rate was set at 35%. Of significance is the fact that prior to the enactment of TRUIRJCA on December 17, 2010, House Democrats strongly voiced their opposition to the significant bump in the estate tax exemption and decrease in the estate tax rate and even tried to pass a bill that would have reinstated the 2009 exemption and rate, but to no avail.
So what will happen with the federal estate tax during the next few years? In 2011 there were a significant number of bills introduced in the House that called for complete repeal of the tax:
- Jan. 14, 2011 - Count 'Em Up, Five Bills Already Introduced to Repeal Estate Taxes
- April 4, 2011 - H.R. 1259 - Bipartisan Bill to Permanently Repeal Federal Estate Tax Introduced in the House
- May 31, 2011 - Revisiting H.R. 1259, The Bipartisan Death Tax Repeal Permanency Act
And during the summer of 2011 there was speculation that the Senate was working on a compromise to permanently set the estate tax exemption at $5,000,000 and the estate tax rate somewhere between 35% and 45%:
As I suspected, this rumor went nowhere fast.
And then in the fall of 2011 there were rumors circulating that the Super Committee would propose rolling the estate tax and gift tax exemptions and rates back to 2009 levels:
As we know now, the Super Committee fell flat on its face on all fronts.
And then right on the heels of the Super Committee rumors, Rep. Jim McDermott (D-WA) introduced the Sensible Estate Tax Act of 2011, which would have set the estate tax exemption at $1,000,000 but as indexed for inflation starting with the year 2000, set the estate tax rate at 55%, and made portability of the estate tax exemption between spouses permanent:
- Nov. 28, 2011 - More on H.R. 3467, The Sensible Estate Tax Act of 2011
That bill promptly fell flat on its face.
And now that the search for the Republican presidential candidate is in full swing, it should be noted that all of the major Republican candidates want the federal estate tax to be repealed:
- Dec. 19, 2011 - What Do the 2012 Republican Presidential Candidates Think About the Federal Estate Tax?
What Are Congress's Estate Tax Options?
Nonetheless, as in previous years, and particularly since this is a presidential election year, members of Congress will surely continue to drag their feet and then wait until the very last minute to act to head off the expiration of TRUIRJCA, or perhaps not act at all. With that said, there are currently five different paths for Congress to take during 2012:
- Do nothing. The first option is for Congress to do nothing and allow TRUIRJCA to expire as it is scheduled to do on December 31, 2012. If this happens, then a $1,000,000 estate tax exemption and 55% estate tax rate will kick in on January 1, 2013.
- Extend TRUIRJCA. The second option is for Congress to extend TRUIRJCA for 2013 and beyond. This would mean that the estate tax exemption would be indexed for inflation above the $5,120,000 exemption that has gone into effect in 2012 and the estate tax rate would remain at 35%.
- Pass a compromise bill. The third option is for Congress to pass some form of an estate tax compromise which will lower the estate tax exemption and increase the estate tax rate to something more in line with the 2009 numbers of $3,500,000 and 45%. This may also include repeal of portability of the estate tax exemption between spouses which is in effect for the 2011 and 2012 tax years.
- Repeal the estate tax. The fourth option is for Congress to completely repeal the federal estate tax. This is a real possibility since Republicans are in control of the House and a substantial number of congressional Republicans favor full repeal of the estate tax. Couple this with the significant number of bills that were circulated in the House in 2011 that called for full repeal, with one bill being bipartisan and having 193 co-sponsors, and the possibility of repeal has never been greater.
- Throw in a wild card. The fifth option is for Congress to do something new and different that is not listed above. I call this wild card option the "your guess is as good as mine" option.
What Does the Estate Tax Straw Poll Show?
Back at the beginning of 2011 I posted an "Estate Tax Straw Poll" which posed the question, What do you think Congress will do with the federal estate tax for 2013 and beyond? The straw poll offers five answers to choose from which coincide with the five options listed above.
So what do those who have voted in the poll think? Currently option #2, extend TRUIRJCA, has a significant lead over the other options, and this has in fact been the trend during the entire time the poll has been posted.
To vote in the Estate Tax Straw Poll, follow this link: New Estate Tax Straw Poll - Cast Your Vote! - What Do You Think Congress Will Do With Estate Taxes for 2013 and Beyond?
To view the current straw poll results, follow this link: Current Results.
