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E-Alert - Chances for Repeal of the Estate Tax Lessen — Congress May Settle for Permanent Increase in Exemption Amount
On April 13, 2005, the House voted 272 to 162 to permanently repeal the estate tax. The bill passed by the House would repeal the estate tax in 2010 and is projected to cost the federal government $290 billion in revenue over ten years.
Opponents to repeal of the estate tax in the Senate argue that the tax benefit would accrue to only the richest of Americans. IRS statistics for 2001 show that of the 2,363,100 total adult deaths in that year, only 49,911, or 2.1%, had estates large enough to require the filing of an estate tax return. On average, this would amount to savings of over $480,000 per taxable estate, although the benefit would actually be much greater for larger estates (according to ResponsibleWealth.org, nearly half of the estate taxes are paid by the wealthiest 0.1% of the population, meaning half of the $24 billion in estate tax savings would accrue to these already wealthy individuals).
The Heritage Foundation proclaims that the death tax hinders economic activity in the following ways: (1) discourages savings and investment, (2) undermines job creation and wage growth, (3) prevents the economy from achieving its investment potential, and (4) contradicts the central promise of American life: wealth creation. Proponents of death tax repeal also tout how the estate tax hurts small business owners and family farmers.
Yet, statistics provided by the Treasury Department show that only 776 of the 47,482 taxable estates filed in 1998 had family owned business assets equal to at least half of the estate value. Those same statistics show that only 642 of the 47,482 taxable estates had farm assets equal to at least half of the estate value. Thus, family owned businesses or farms formed the majority of the estate in only 1,418 of the approximately 2.3 million people that died in 1998. Similarly, statistics provided by the Agriculture Department show that less than 1.5% of farms have a net worth of more than $3 million.
Faced with finding revenues to finance the growing deficits and worries about the health of Social Security and Medicare, many Senators are reluctant to support a repeal of the estate tax – making the possibility of gaining the support of the sixty Senators needed to permanently repeal the estate tax unlikely. Senate Finance Committee Chairman Charles Grassley (Rep. – Iowa) has already authorized Senator Jon Kyl (Rep. – Arizona) to strike a deal that is more likely to garner the necessary sixty votes. Senator Charles Schumer (Dem. – NY) is leading the negotiations for the Democrats, which has raised the prospect that the long-standing stalemate on the estate tax could be broken this year.
The Democrats have already offered a compromise package in the House, which would have increased the estate tax applicable exclusion amount to $3 million per person in 2006, to be further increased to $3.5 million per person in 2009. According to the Urban Institute – Brookings Institution on Tax Policy, that bill would have exempted 99.7% of estates from federal death taxes. That bill was rejected 194 to 238 in the House.
Also being taken into consideration during these Congressional negotiations are the proposals made earlier this year by the Joint Committee on Taxation dealing with family limited partnerships, generation-skipping trusts, Crummey powers and Section 529 savings plans (see our March 2005 FaxAlert entitled “Joint Committee on Taxation Proposes Tax Law Effecting Estate Planning”).
Senator Grassley has thrown his weight behind the negotiation effort. “We need certainty. We cannot continue on with this course” said a Republican Finance Committee aide. Many family–owned businesses and affluent heirs have begun appealing to lawmakers for a deal that provides estate planning certainty, even if it means setting aside full estate tax repeal.
The net result is that the vast majority of estates may be removed from the federal tax rolls in the near future. However, the need for estate planning remains greater than ever. Issues such as state estate tax reduction (many states are raising their estate taxes to offset their reduced shares of federal revenue), probate avoidance, reductions of intra-family hostility, divorce and creditor protection, business succession concerns, and income tax reduction strategies are but a few of the reasons that your clients should continue to seek the help of an experienced estate planning attorney.
The Law Firm of Morris, Hall & Kinghorn remains committed to keeping our clients and professional referral sources updated on the latest changes of federal and state law affecting estate planning. Have your clients contact our firm to schedule a free one-hour appointment to determine how the latest proposals from Congress might effect their estate plans.
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