Halfway through 2010, we still do not know what the federal estate tax will be when we wake up on January 1, 2011. In 2001 Congress passed EGGTRA, the Economic Growth and Tax Relief Reconciliation Act of 2001. At that time the economic future was bright, and there were surpluses in the government's budget.
For procedural reasons the legislation was drafted to "sunset" in ten years. The federal estate tax in 2001 provided for an exclusion amount in each estate of $1,000,000, with assets over $1,000,000 taxed at up to 55%. Under EGGTRA the amount excluded gradually rose to reach $3,500,000 in 2009, with any excess taxed at 45%, with an estate tax "sunset" in 2011.
If Congress did not vote on the subject, the estate tax would sunset in 2010, and then in 2011 it would return to what it was in 2001. It was expected that Congress would vote to continue the federal estate tax as it was in 2009, with an exclusion amount of $3,500,000 and a top rate of 45%.
Congress has so far not passed any federal estate tax legislation. If Congress does not act by December 31 of this year, on January 1, 2011, the federal estate tax will revert to what it was in 2001.
Senators Bernard Sanders, of Vermont, Thomas Harkin, from Iowa, and Sheldon Whitehouse, of Rhode Island have proposed a bill called the Responsible Estate Tax Act. (Tax bills almost always have wonderful names, like "Fairness" or "Equity" or "Reconciliation" - maybe as Mary Poppins said, "a little sugar helps the medicine go down.' This would establish the federal estate tax exemption at $3,500,000 with a top rate on the excess of 45% up to $10,000,000, 50% on the next $40,000,000, and 55% over $50,000,000.
This bill limits what the Internal Revenue Service regards as abusive devices to reduce estate taxes. These include valuation discounts and short-term Grantor Retained Annuity Trusts (GRATS).
I believe that this bill may pass, because it has something for everyone. It removes most estates from estate taxation, and at the same time it imposes a very substantial tax on large estates. In addition, it closes what the IRS has for a long time regarded as "loopholes."
