Still Stuck in Estate Tax "Purgatory"!*

Here's an oxymoron for you--as an advisor, I want to be able to share an "update" with my clients and readers regarding the estate tax "repeal" situation, and there's really no solid update to report!  So, instead, I'll share a little bit of what has been going on behind the scenes...

There have at least been some meetings that have taken place.  There have been a number of different bills introduced, but nothing has really gotten very far.  The three most likely scenarios at this point are as follows:

1) A reinstatement of the estate tax with an exemption of $3.5 Million and a tax rate of 45%.

2) A reinstatement of the estate tax with an exemption of $5 Million and a tax rate of 35%.

3) Congress does nothing, and the estate tax comes back with an exemption of $1 Million and a tax rate of 55%.

Generally, Republicans favor the highest exemption and lowest tax rate, while Democrats generally favor reinstatement at the middle numbers (2009 levels).

Two developments have taken place seemingly make it less and less likely that there will be any action taken soon, however.

First, although Democratic leaders seemed willing to agree to Republican demands in recent talks, they still broke down.  It seems that there are many rank and file Democrats who are now willing to let the tax issue take care of itself, preferring to not take the political risk of appearing to pass legislation favoring the richest Americans--especially so soon before the November elections.

The Democratic leadership appears to be unwilling to bring legislation forward that does not have the support of the majority of the party.  One Senator is quoted as saying more than 80% may be opposed to the increased exemption and lower tax rate discussed by party leaders.  Thus, it may be that nothing is addressed prior to November and that any action taken would be rushed, as was the case with the failed effort to address the situation at the end of 2009.

The second issue that originally looked promising in terms of pushing early action was that of retroactive application of any reinstatement.  Retroactive application was "iffy" during the best of times.  Now, it seems like a long shot.

In late March, Texas billionaire Dan Duncan died.  With an estate estimated at $9 Billion dollars, Duncan was listed on Forbes as the world's 74th wealthiest person.  A lawsuit was a certainty if retroactivity was pursued by Congress at any point.  Now there are significant resources that would obviously be available to oppose any attempt to apply taxes retroactively.  Thus, the compelling urgency originally felt by those who want to reinstate the tax retroactively, already losing steam with each passing day, has now been undercut severely--and probably completely.

So, these are just a few key tidbits--I definitely haven't covered everything that's going on right now--but it doesn't appear that we'll be leaving estate tax "purgatory" quite yet.

*Adapted from the Planning Partners Press.