R.C. Lim, Attorney and Counselor at Law

The Big Question: Will the Estate Tax Disappear?

Now that it’s November and Congress is still putzing around in committee, the question of whether Congress will find enough time to pass a new estate tax bill is an open question.

As I have pointed out, failing to act will create a perverse incentive to die in 2010 so that an estate can pass tax free. Perhaps the legislators have a hard time grasping that tax policy could affect such an important decision, but I have had heard enough sick and elderly joke about this to know that it is only some people peoples’ minds.

Failing to act will also make hay of the current system that balances the bite of a steep estate tax (45%) with the benefit of a stepped-up basis. Property received at death prior to 2010 will receive the basis step up, while property received in 2010 will not. On the other hand, the accounting burden here is no different than what the service and people routinely already choose to accept when they create GRATs, QPRTs, and FLPs.  Still, there is an important difference when a person chooses, or can choose this benefit, versus cases where it is not chosen. Under current law, a family must balance the benefit of locking in the value of the asset versus the benefit of date-of-death step-up in tax basis. The decision is either made or not made.

My concern and belief is that most will attempt to wait out the uncertainty and only later will discover that many vehicles that might have saved their heirs from a big, nasty, and resurgent estate tax. In a recent WSJ article, another estate planner shares the same concern, stating simply “I would advise anyone who wants to do a GRAT or Family Limited Partnership to do it soon, like yesterday.” There are two simple reasons for this. The first is that the country is unlikely to forgo tax revenues in a time of growing deficits.  The second is that the populist sentiment in this country that should arise as a backlash from the economic crisis has only just started to be felt. The political climate will soon change to disfavor the wealthy, and there is no more glaring symbol of Bush’s Gilded Age than the nonexistent estate tax.