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New York Estate Planning, Probate & Estate Litigation Blog

Monday, July 19, 2010

Putting the Price of Death on Layaway

In 2001, President George W. Bush signed the Economic Growth and Tax Relief Reconciliation Act. Not only did the law restructure the income and capital gains tax systems, it also completely overhauled the existing legislation governing the federal estate tax.

Before the Bill was signed into law, the estate tax rate held steady at 55% for all assets over the $1 million threshold. That threshold was raised to $3.5 million with the passage of the new estate tax law and the rate was systematically lowered until it reached 45% by 2009.  In 2010 the law provided for a “repeal” of the estate tax, albeit for only one year, after which the 2001 law would sunset and the old estate tax regime with a $1M exemption would be revived.   So why the repeal for only one year?  This was largely a political maneuver to allow President Bush to make good on his campaign promise to repeal the estate tax.  Analysts have been speculating that the law would be amended prior to 2010 to prevent what has in fact occurred, a suspension of the estate tax.  Indeed, since January 1st of this year a number of billionaires have been able to virtually avoid the estate tax altogether.

Congress has had a very busy legislative schedule in the recent past (think healthcare and financial reform) but Capitol Hill is finally coming around to address this issue.  As lawmakers rush to reinstate the tax, new propositions have been made by both Republicans and Democrats. Though many on the right would like to see the tax abolished for good, progressives would like to raise the rate and lower the exemption threshold.  The most probable outcome will likely be a compromise.

One of the Senate’s most influential members, Minority Whip Jon Kyl, who is a Republican from Arizona, has proposed a lower rate with higher exemptions.  Though the details of the plan have not been officially released, it is believed by many that the proposed rate would be held at 45% for all estates worth more than $3.5 million. However, some observers have speculated that the plan may call for the threshold to be raised to $5 million with a lower rate of 35%.

One of the more innovative proposals is one which establishes a lifetime prepayment plan.  Since the estate tax’s inception in 1916, it has only been imposed after death. With this proposal, estimated estate taxes can be paid long before your last breath.  The rate would also decrease from 45% to 35% if it is paid in advance. This way, not only would one pay less in overall estate taxes, but the federal government would also receive revenue sooner.

The downside to paying in advance? First, the payment plan, no matter how flexible, would only be available to the privileged few who have liquid assets lying around. For most, the vast majority of their estate’s assets are held in homes, businesses or other assets with fluctuating market values, which are considered illiquid. Second, problems would arise if someone is able to put assets into a trust and over time it loses, rather than gains value. Lastly, since the payment plan would have to be based on the expected value of the estate at the time of death and not the actual value, unforeseen market fluctuations may either overcharge the individual or underpay the federal government.

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