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Estate tax is expiring, but its death isn't likely to last

December 22, 2009
WASHINGTON — A congressional tax standoff has opened a window of opportunity
for wealthy Americans determined to avoid paying up post-mortem.

With lawmakers unable to agree on a year-end fix for a quirk in the Bush-era
tax cuts, the federal estate tax is set to be repealed for one year as of Jan.
1, meaning that those who suffer a timely death could escape the usual
certainty of taxes.

"If you are at the checkout counter, you might want to expedite things," said
Rep. Richard E. Neal, D-Mass., who heads the House subcommittee on taxation.

While the tax is about to expire, it probably should not be buried just yet.

Democrats are vowing to resurrect it as soon as Congress returns in 2010. Even
its most ardent foes acknowledge that some accommodation will have to be
reached because the tax is now scheduled to rise from the grave, zombie-like,
with even more reach in 2011.

"We understand we are not going to be able to keep total repeal in place
permanently," said Dick Patten, president of the American Family Business
Institute, an advocacy group that opposes the estate tax. "By the time we reach
the end of next year, we know we have to come with a compromise solution that
is advantageous to the survival of family businesses."

For now, he and the backers of his group are celebrating as the countdown clock
at NoDeathTax.org ticks down to zero. But not everyone is happy. The extremely
jumbled tax situation has members of Congress at odds, estate planners facing
questions from their clients and, perhaps, the heads of some wealthy families
wondering if relatives gathered for the holidays truly wish them a happy and
healthy new year.

"It has the potential for chaos," said Chuck Marr, director of federal tax
policy at the Center on Budget and Policy Priorities.

The situation dates to 2001 when Republicans, with President George W. Bush
newly ensconced in the White House, sought to realize their goal of eliminating
a tax on assets being passed on to heirs. The tax became an iconic issue among
Republicans who labeled it the death tax and rallied around its repeal in the
mid-1990s during their push to win control of Congress.

Backers of the tax cuts wanted it eliminated altogether. But because that would
have proved too costly, Congress instead devised a convoluted scheme that
gradually raised the value of estates exempt from the tax and reduced the tax
rate to the point — for the next two weeks — that an individual estate valued
at $3.5 million or more is taxed at the rate of 45 percent. (This year, the tax
will bring in an estimated $25 billion.)

At the beginning of the new year, that tax is eliminated entirely, only to be
restored in 2011 at a rate of 55 percent on estates of $1 million or more —
essentially the law in effect before the 2001 change.

At the time, Republicans assumed they would simply fix the flaws well before
2009 ever arrived, presumably through a full repeal of the estate tax. But the
political pendulum swung, bringing to power Democrats who were highly resistant
to rescinding the tax, a move that many of them believed would be too generous
to the nation's most affluent.

As this year drew to a close, Democrats scrambled unsuccessfully to find an
alternative to the wild swings in taxation. But they failed to persuade
Republicans to agree to extend the current law, at least until a better
approach could be devised.

There is yet another wrinkle. When they scheduled the demise of the estate tax
for 2009, the authors of the 2001 tax measure replaced it with a capital gains
tax of 15 percent on inherited property that is later sold.

The threshold for being subject to those taxes is set lower, with the first
$1.3 million in capital gains exempted for general heirs and $3 million for
spouses. Democrats argue that thousands of estates that would not have been
subject to taxes under the current law could get hit in 2010 even as those at
the higher end of inheritance scale escape the 45 percent tax bite.

"If you are rich, celebrate," said Nevada Sen. Harry Reid, the majority leader.
"If you are not, you should be afraid."

Republicans note that the capital gains tax will be levied only if heirs sell
the assets, providing incentive for families to hold on to their farms and
businesses.

"As between paying 45 percent and 15 percent, I think it is pretty clear what
most small-business folks and farmers would like to do," said Sen. Jon Kyl,
R-Ariz., a longtime foe of the estate tax.

Democrats hope to make the situation moot by restoring the current tax and
making it retroactive to Jan. 1. Republicans would like to negotiate a new tax
structure, perhaps taxing eligible estates at the 15 percent capital gains rate.

Either way, one thing does seem certain: The struggle over the death tax is not
likely to pass on anytime soon.
BY CARL HULSE
NEW YORK TIMES
Sunday, Dec. 20 2009



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