Greenville Estate Lawyer: “Estate Tax Redux”
June 6, 2010
Well, we are almost through one half of the year 2010, and there is not much news to report on what will happen to the federal estate tax. As you may know, pursuant to the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), there is no federal estate tax in 2010. There is also no estate tax in South Carolina this year, as has been the case since January 1, 2005.
In December 2009, the U.S. House of Representatives passed a tax bill that would make the 2009 federal estate tax law permanent, thus locking in the 3.5 million dollar per person estate tax exemption and 45 % top tax rate. The Senate never took up this bill. There has been some political rangling in the Senate lately, but Democrats are unwilling to take up a bill unless they are fully confident they can get a floor vote. The reasons for this are beyond the scope of this post, but suffice to say that political rangling is preventing new federal estate tax legislation.
With the possibility of a double dip recession looming, the oil spill that will not end, and mid-term elections coming up that may dramatically alter the make up of Congress, one wonders whether anything will happen on this issue.
What is interesting is what will happen to South Carolinians if the federal estate tax is allowed to come back in 2011 under pre- EGTRRA law. Not only will the federal estate tax come back with a vengeance with a 1.0 million dollar tax exemption and 55 % maximum tax rate, but the S.C. estate tax will also be resurrected.
To understand why the S.C. estate tax will come back in 2011, you need to understand how that tax is calculated. The S.C. estate tax was (and still is) known as a “sop tax” or a “pick up tax.” Pre 2005, the federal estate tax law (Internal Revenue Code Section 2011)provided a tax credit for state death taxes paid. The SC estate tax was (and still is) set at the maximum amount of the federal state death tax credit. (See South Carolina Code 12-16-510, 12-16-520, and 12-16-530.) The reason why the SC estate tax disappeared in 2005 was because the federal state death tax credit was abolished and replaced with a federal state death tax deduction. With no federal credit with which to calculate the SC estate tax, the SC estate tax ceased to exist. The SC legislature passed no legislation to abolish the SC estate tax, it actually did nothing and allowed the SC estate tax to disappear………until 2011.
Fast forward to 2011. In the year 2011 the EGTRRA of 2001 expires. The federal state death tax deduction disappears, and in its place comes back the federal state death tax credit. As a result, the SC estate tax law is back to sop up the maximum amount of the federal estate tax credit.
Here is an easy way to understand what is happening. In 2001, Congress passed an estate tax law that was phased in over several years. In 2005, the 2001 law finally abolished the federal tax credit for state death taxes paid. As a result, in 2005 there was no way to calculate the SC estate tax. In 2011, the federal tax credit for state death taxes paid comes back, and thus, the SC estate tax can again be calculated. Absent legislation by the Congress in 2010 changing the status quo, or separate legislation by the South Carolina legislature, estates of South Carolinians passing away in 2011 and beyond will be subject to both federal and state estate taxes.
You just cannot make this stuff up. Stay tuned….
