Congress passed a law in 2001, which the President signed, that creates a fabulous tax benefit for those who die in 2010.  If you’re lucky enough to pass on during that year, your heirs will pay zero federal estate tax.  By contrast, if you die in 2009, the tax rate is 45% and, if you stay with us until 2011, you could pay as much as 55%.  What aim of tax policy is satisfied by this crazy quilt tax system?  None, of course, it’s just a product of budgetary rules.

     Since 2001, there has been much talk of repealing the federal estate tax.  First, it was given a new, and sinister, name, the “death tax”.  Then, politicians complained that it was the cause of family farms being lost, which apparently has never happened that anyone can determine.  The federal estate tax was said to be the only completely unfair tax, as if all the others were completely fair.  It looked as if repeal might be passed in the Senate, but the effort was derailed by Hurricane Katrina.  Then, in the 2006 midterm elections, the control of Congress shifted to the Democrats, who seem less interested in repeal.  And, more attention is now being focused on the alternative minimum tax, which affects millions of middle class taxpayers.

     Now what?  There is sentiment among the Democratic majority in Congress, and particularly the Chair of the Senate Finance Committee, Max Baucus, for a change in the law.  A proposal has been suggested to continue the tax rules that will be in effect in 2009 for all subsequent years.  The 2009 rules are a flat rate of 43% and an exemption amount of $3,500,000.  That means no tax on the first $3,500,000 (possibly as much as $7,000,000 for married couples) and a 43% tax rate on the balance.  In fact, that would remove from taxation more than 95% of taxpayers.  So, there would be no “free ride” for those who die in 2010, but the rates would not rise to 55% (and the exemption would not fall to $1,000,000) in 2011 and later years. 

     It sounds like a good deal, but the value of people’s homes and retirement accounts are still rising, so perhaps by 2011 the $3,500,000 exemption will be a lot less valuable than it is now.  For that reason, members of both parties have suggested that the exemption should gradually rise to $5,000,000, and have also suggested a maximum rate of 35%. 

     Barring some dramatic change in the budget deficit over the next few years, or a complete reversal of the 2006 election returns, the federal estate tax will not be repealed.  Tax rates might fall and exemption amounts might rise somewhat, but those with substantial and growing assets should plan that the tax will be imposed, although we hope not until the distant future.