Updated April 21, 2014
For a summary of what happened with the fiscal cliff deal and estate taxes, refer to 2013 Estate Tax and Fiscal Cliff Update - Senate Passes American Taxpayer Relief Act, House Balks But Passes it Too. The bottom line - the estate tax exemption, lifetime gift tax exemption and generation skipping transfer tax exemption will each be $5.25 million for 2013 and indexed for inflation in later years, and the top tax rate will be 40%. In addition, portability of the estate tax exemption between married couples will continue in effect, and the pick up tax, which would have been a revenue boon to states like California and Florida, did not come back.
Of course, these are supposed to be "permanent" changes to the laws governing these types of taxes, but as we have observed in the past, anything can happen in the future. Therefore, I have written a new article with new predictions about the future of estate taxes: What is the Future of Federal Estates for 2014 and Beyond?
Discussion of Future of Estate Tax for 2012 and Prior Years
While we know what the federal estate tax rules will be until the end of 2012, what will happen in 2013 and beyond is, believe it or not, still 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% as well. (For a summary of the rules that actually went into effect in 2013, refer to Overview of 2013 Estate Tax, Gift Tax & Generation Skipping Transfer Tax Laws.)
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.
So now that we are at the eleventh hour and there is still a lot to address before the clock strikes twelve, 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 went into 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, and his budget proposals for 2012 and 2013 have included these numbers: Obama's 2013 Budget and Estate Taxes - Same Thing, Different Year.
Nonetheless, in early December 2010 President Obama and Senate Republicans 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 $1.5 million bump in the estate tax exemption and 10% 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, but to date none of them have even been brought up for a vote. 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 now know, the "Super Committee" ended up falling flat on its face on all fronts.
With President Obama still supporting the 2009 estate tax exemption and rate, it should be noted that during his campaign for president Mitt Romney supported full repeal of the estate tax - no surprise there.
With all of that said, in this presidential election year the end of July and beginning of August ushered in feeble attempts by Congress to address the expiring Bush-era tax cuts across the board. On July 25, 2012, the Senate passed the Middle Class Tax Cut Act, which extends the Bush income tax cuts through 2013 for all taxpayers except single filers earning above $200,000 and joint filers earning above $250,000, but due to infighting among Senate Democrats the bill deliberately failed to address the estate tax. On August 1, 2012, the House passed the Job Protection and Recession Prevention Act, which extends all of the Bush-era tax cuts through 2013 and also includes a one year extension of the 2012 estate tax rules. Shortly thereafter Congress adjourned and then returned after Labor Day and proceeded to get nothing done. With memories of the presidential election fading fast, Congress returned to Washington briefly, left again for the Thanksgiving and then Christmas breaks, and are now suddenly back in Washington, trying to hash out a deal at the absolute, very last minute.
What Are Congress's Estate Tax Options?
What emerged from the late summer attempts to address the expiring Bush-era tax cuts are three distinct estate tax groups:
- The Extenders - Republicans and Democrats from farming states who simply want to extend the current $5,120,000 estate tax exemption and 35% estate tax rate. A subgroup of the Extenders is the Repealers - those who really want to see the estate tax repealed but know that they do not have enough support right now, so they will settle for extending the 2012 rules and work towards complete repeal in the future.
- The Conformers - Democrats who have aligned themselves with President Obama and want to reinstate the $3,500,000 estate tax exemption and 45% estate tax rate.
- The Reverters - Democrats who want the estate tax laws to revert back to the 2001/2002 rules, which will result in a $1,000,000 estate tax exemption and 55% estate tax rate.
- Repeal the estate tax. This will mean that the Repealers were able to get enough of the true Extenders and some of the Conformers on board to vote for repeal. There is absolutely no chance of this happening at this late stage of the game.
- Extend TRUIRJCA. This will mean that the Extenders were able to get enough of the Conformers, including President Obama, on board to extend the 2012 estate tax rules, much to the chagrin of the Reverters. An overwhelming majority of the voters in my Estate Tax Straw Poll support this option. At this point this option has moved to the forefront – see more on this below.
- Pass a compromise bill. This will mean that the Conformers were able to get enough of the Extenders on board to reinstate the 2009 estate tax rules, much to the chagrin of the Reverters. As noted above, Senate Democrats included the 2009 rules in an early version of the Middle Class Tax Cut Act but bowed to party pressure and removed the estate tax provisions prior to voting on the bill, while House Democrats tried to get the 2009 rules substituted for the 2012 rules in the Job Protection and Recession Prevention Act but were shot down. In addition, in early December a handful of Senate Democrats voiced their opposition to President Obama's estate tax stance and instead threw their support behind extending the 2012 exemption and rate. At this point this option, while garnering a lot of publicity, appears to lack enough support to become law – see more on this below.
- Do nothing. This will mean that the Extenders were not able to get enough of the Conformers on board to extend the 2012 estate tax rules, and so this will cause TRUIRJCA to expire on its own on December 31, 2012, much to the delight of the Reverters. If this happens, then a $1,000,000 estate tax exemption and 55% estate tax rate will kick in on January 1, 2013. At this late stage of the game this option remains on the table – see more on this below.
- 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 could a wild card option look like? On December 11 a group of wealthy progressives including Warren Buffett, former president Jimmy Carter and Bill Gates Sr. let the president know that they support a $2,000,000 estate tax exemption and estate tax rate starting at 45%. Could this be a possibility? With three options showing at least marginal or even significant support in Congress – extension of the 2012 rules, reinstatement of the 2009 rules, and complete repeal – a wild card does not appear to be on the horizon, at least before the end of 2012.
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 all of the other options, and this has in fact been the trend during the entire time the poll has been posted. Interestingly enough, for the longest time the other votes were evenly divided among option #1, option #3 and option #4, but recently votes for option #3 - President Obama's favorite - have been outpacing votes for option #4 - do nothing - and option #1 - repeal the estate tax - has started to lag way behind in votes. Even so, the fact that the 2009 estate tax provisions were removed from the Senate's Middle Class Tax Cut Act (which, by the way, the president has really been urging House Republicans to sign before the end of the year), and House Democrats failed to get the 2009 rules substituted for the 2012 rules in the House's Job Protection and Recession Prevention Act is very telling – with the balance of power in Washington unchanged, it is doubtful that option #3 will gain enough support in the next two days to become law. Instead, it appears that option #2 - extend the $5 million+ estate tax exemption - may be one of the compromises that Republicans will accept in exchange for allowing income tax rates to increase on top earners. If not, then it is quite possible that the estate tax will be left out of any bill that is passed on December 31, which means that option #4 - do nothing - will be the end result.
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.