The Democrats are divided into their usual factions, and the Republicans aren’t sure whom they represent.
It’s possible that the House will vote for an extension of the current estate tax rates shortly, but as usual, no one is sure until it actually happens. The Democratic leadership, and President Obama, would like to extend the current $3.5 million (per person) exemption indefinitely. Some Democrats want to reduce the exemption, while others want to increase it to $5 million; and others want to do that and index it for inflation (in case we ever have any).
The Republicans are divided. Business owners and their lobbyists like the $5 million exemption, especially with indexing, and the reduction to 35 percent in the flat rate. A $5 million exemption means that a husband and wife could, with some planning, pass $10 million of assets free of tax. That would eliminate the tax for nearly everyone. But there are others still holding out for complete repeal of the tax, which benefits the very rich, or a reduction in the rate to 15 percent, which would be far more costly that the Democratic proposal, at a time of exploding deficits. The Republicans are divided, in a sense, between the Main Street party, representing the owners of small to midsized businesses, and the wealthy contributors for whom a $5 million exemption is pocket change.
It’s also possible that no change in the law will occur, which means that 2010 will be a year of no estate tax. This would be a nonsensical and fiscally irresponsible result. Trust and estate practitioners, who seem to be represented in both parties, would like to see certainty, so that efficient planning could take place. It certainly won’t happen this year, but a sensible change to the estate and gift tax, one that encourages business growth and the passage of wealth to younger generations, might include the following:
- An exemption of at least $3.5 million rising fairly soon to $5 million, and indexed to inflation.
- A rate that is settled on, either 35 or 45 percent, or perhaps 35 percent up to $20 million and 45 percent thereafter.
- An expansion of the gift tax exemption from $1 million to the amount of the estate tax exemption, to promote lifetime gifts.
- Portability of the estate tax exemption, so that if one spouse can’t use the full amount, the surviving spouse can use the difference.
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