Stabilizing the Estate Tax

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SEPTEMBER 2006 - Difficult as it may seem to believe, the federal estate tax has a long, consistent history in this country. The tax, imposed on the estates of high-net-worth taxpayers after death, has been around since 1916, and, with the exception of rate adjustments and periodic increases in the amount exempt from the tax, its principle has remained essentially unchanged. Americans with estates over a certain amount knew they would be affected by the tax, knew what the tax would be in the future, and could, at the very least, plan accordingly.

But consistency can no longer be expected. Since the Economic Growth and Tax Relief Reconciliation Act was passed in 2001, a divisive, politically charged debate has placed the status of the tax in constant flux, and change seems to be the norm, not the exception. As it now stands, estates worth $2 million or less are excluded from the tax, but in 2009 this will increase to $3.5 million. At the same time, estate tax rates will decrease from a top rate of 46% this year to 45% next year through 2009. In 2010, the estate tax will be repealed in its entirety, but—in a bizarre twist—in 2011 the tax will return, at pre-2001 levels (an exclusion of $1 million and a top rate of 55%).

Confusing enough for you?

When Instability Hinders PlanningWhether you think the estate tax should be raised, lowered, or eliminated altogether, it’s hard to argue with one point that’s getting little press: Constant changes severely limit the ability of high-net-worth taxpayers to engage in tax planning. This is a real issue, not merely an esoteric controversy being debated in the halls of Congress. Indeed, few political debates reach into the hearts and homes of affected Americans more powerfully and more tangibly. Right now, many Americans are unable to adequately plan for the future of their loved ones, and in the end, what’s more important, or more visceral, than that?

All the political maneuvering also significantly limits the ability of CPAs to provide informed guidance to their clients. Wills, trusts, charitable bequests, and other estate-planning documents are now burdened with a litany of contingencies and alternative planning devices designed to allow taxpayers to pass their assets on to loved ones effectively. But the introduction of complexity and contingencies in an attempt to “even the odds” of an uncertain future only increases the chances that a taxpayer’s final wishes may never be realized.

To the general public and many CPAs, the particulars of the estate tax debate are not, in fact, the truly important issue. It is the uncertainty. The NYSSCPA’s Tax Division Oversight Committee recently prepared a letter to U.S. Senators Hillary Clinton and Charles Schumer stating that, without legislation to clarify the long-term treatment of estates, planners and the public are left playing a guessing game—a situation that does not foster confidence in our system of taxation.

Whatever the outcome—be it elimination or adoption of a concrete, stable tax—our political leaders in Congress need to make a firm decision. Pick one rate, pick one exemption, and stick to it. After years of change and uncertainty, it’s time for Congress to put aside political differences and work together for the good of the American public.

Louis Grumet
Publisher, The CPA Journal
Executive Director, NYSSCPA





















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