Alas, after many months of health care debate (if we can really call it that) in the U.S. Congress seemingly drowning out all other issues, come signs of life on the federal estate tax front.  The House of Representatives is considering an extension of the current estate tax law. 

You may or may not know the current state of the federal estate tax. For deaths in the year 2009, there is a $3.5 million estate exemption per person and the top tax rate is 45 percent.  This means that unless an estate is valued above that (large) figure, there is no federal estate tax to be owed. It gets even better in 2010.  For deaths in 2010, the federal estate tax ceases to exist, no matter how large the estate.  This sounds great, but it only lasts for one year.  For deaths that occur in 2011, the federal estate tax comes roaring back, with the estate exemption reduced to a mere $1.0 million, and the highest rate is increased to 55 percent.     

A bill proposed by House Democrat Earl Pomeroy aims to extend the current law, leaving the exemption at $3.5 million, the top rate at 45%, and not allowing the estate tax to expire in 2010.  This sounds reasonable.  Only a very small percentage of estates owe estate tax at the current exemption levels, especially when considering that spouses, with proper planning, can pass $7.0 million, estate tax free, to their heirs. 

The current state of the federal estate tax law is unacceptable because there is too much uncertainty.  Clients with even modest estates who undertake estate planning must be advised that in 2011 the exemption amount will only be $1.0 million.  A $1.0 million dollar estate is not that difficult to achieve considering the value of real estate holdings and the oft-overlooked life insurance that can be a part of the gross estate.  It is this uncertainty as to what will be in 2011 that makes things difficult.  In a business where trying to predict future events is a part of the game, this uncertainty is unacceptable.       

Estate tax legislation may have a difficult time passing through the U.S. Senate. Ever the saucer used to cool the hot waters of politics, the Senate requires that any such legislation have a way to pay for itself.  Letting the estate tax expire in 2010 and come back in 2011 will raise $234 billion more in tax revenues over the next ten years than would keeping the law as it is in 2009.  In a nation whose national debt currently stands at more the $12 trillion dollars, can it really be justified to forgo this badly needed tax revenue? 

The U.S. Congress is quite busy of late, and has a lot on its plate for the rest of the year. I would be somewhat surprised if new estate tax legislation is passed before the end of the year.  Stay tuned.