Legislators in Congress are reportedly considering creating a kind of Roth IRA version of the estate tax. On The Money, a blog of the congressional newspaper The Hill, this week said lawmakers are considering whether to let taxpayers have the option of paying estate taxes in advance so they don’t owe that money when they die. One version would set the tax at 35 percent on estates valued at more than $3.5 million. Pressure is on opponents of the tax to work out a deal before the end of the year, when the rate jumps to 55 percent on estates worth more than $1 million. If you die this year, of course, you pay nothing—at least for now.
The repeal of the estate tax for 2010 was part of the Economic Growth, Tax Relief and Reconciliation Act of 2001, a broad package of tax cuts that gradually reduced estate liabilities over 10 years. Last year estates were taxed at a rate of 45 percent on values greater than $3.5 million, a record exclusion. Congress could still pass a retroactive estate tax for 2010.
Democratic U.S. Rep. Sander Levin, who chairs the House Ways and Means Committee, has said he expects a retroactive tax at 2009 levels this year. The House last year approved new estate tax legislation, but the bill stalled in the Senate. Since then, “significant progress” has been made among senators looking to revive the issue, says Chris Walters, manager for legislative affairs at the National Federation of Independent Business, which has criticized the tax as damaging to family businesses. “The first step is getting 60 votes in the Senate. That’s what we’ve been working on.”
A Roth-style estate tax provision would likely offer lower tax rates and higher exclusions as an incentive to prepay, with the rates gradually rising and the exclusions gradually falling in subsequent years. It would help generate tax revenue in the short run, something legislators need to offset the estimated $60 billion to $80 billion in lost revenue that a reduced estate tax would produce over a 10-year period. “We haven’t seen the details yet” of an overall bill, Walters says. “They’re trying to get to the end zone here, and they’re really close.”
Not everyone is as sanguine about the possibility of getting a quick resolution on the issue. Dan Prebish, a tax attorney who manages the estate planning and business succession team for Wells Fargo Advisors, says advisors should plan as if anything can happen. “My impression is political chemistry is very volatile right now. I’m not so sure anyone, even members of Congress, has a feel as to how this is going to turn out. It truly is all over the map,” he says. A Roth-style estate tax provision “is just crazy enough that Congress could do it,” he adds. “Right now all this uncertainty only applies to 2010. Something will get done, or if nothing is done, we’ll have some certainty in 2011.”
Living in a country without an estate tax isn’t as great a deal for the affluent as it might seem at first glance. Basis adjustments that were crucial to reducing liabilities have also been discontinued. Before 2010, most assets in an estate received a new basis set at the fair market value at the time of the decedent’s death. The concept was to remove a “double tax” effect in which levies fell not only on the estate but also on capital gains that passed to the heirs. Discontinuing the basis adjustments was seen in Washington as a means of offsetting the lost revenue from the temporary repeal of the estate tax.
Regardless of what’s happening in Congress, Prebish says, advisors would be wise to focus their clients’ attention on what estate issues they need to deal with now. It’s a good opportunity to explore client values and goals, he says. The key question to ask is, “If there were no estate tax, how do you want your success to affect your children and grandchildren? What do you want your financial success to mean to the people you value the most?” he says. “It’s an opportunity to get away from just the tax issue and talk about the client’s family. If you can succeed with that conversation with the client, you’re operating on a much deeper level of emotion, of trust, than a conversation on building a great bond ladder.”