|
|
| Bar Bulletin |
February, 2003 |
|
|
THE UNCERTAINTY OF DEATH TAXES
By Edwin G.
Fee, Jr.
A sage once said
that the only certainties are death and taxes. But what about “death
taxes”? The Economic Growth and Tax Relief Reconciliation Act of 2001 (the
“Act”) made drastic changes to the federal estate, gift and
generation-skipping transfer taxes. This article summarizes major
provisions of the Act and makes a few predictions about the future of the
federal estate tax. For a more detailed description of the Act, see “Is
the Death of the Death Tax Greatly Exaggerated?” (Bar Bulletin,
February 2002).
Under the Act, the
maximum estate tax rate will decrease gradually from 49 percent in 2003 to
45 percent in 2007. In addition, the current $1,000,000 estate tax
exemption amount will increase to $1,500,000 in 2004, $2,000,000 in 2006,
and $3,500,000 in 2009. The estate tax will be repealed in 2010.
The maximum gift
tax rate will decrease in the same manner as the estate tax between now
and 2009. In contrast to the estate tax, however, the gift tax will not
be repealed in 2010. Instead, the gift tax will continue at the maximum
individual income tax rate in 2010. In addition, the current $1,000,000
gift tax exemption will not increase any further.
The maximum
generation-skipping transfer (“GST”) tax rate will decrease in the same
manner as the estate tax between now and 2009. The exemption from the GST
tax is $1,120,000 in 2003. Beginning in 2004, the exemption from the GST
tax will be the same as the estate tax exemption. The GST tax will be
repealed in 2010.
Despite the
sweeping nature of the Act, the changes will be reversed in 2011 unless
Congress enacts further legislation prior to that time. The Act’s sun will
set in 2011 due to a rule that requires 60 votes in the Senate in order to
alter revenue beyond a 10-year period. The Act passed the Senate in 2001
with only 58 votes. In 2011, the estate tax will be reinstated with a
maximum rate of 55 percent and an exemption of $1,000,000. The maximum
gift tax rate will become 55 percent again. The 55 percent GST tax will
reappear with an exemption of $1,120,000 (plus increases for inflation
after 2003).
It is highly
unlikely that Congress would allow the estate tax to disappear in 2010,
only to reappear in 2011. There are at least three possible alternatives
to this scenario. Congress might muster enough votes to make the repeal
permanent. Republicans in Congress have advocated this position since
prior to the 2000 election, and permanent repeal has a great deal of
popular support. Before the estate tax exemption increased from $675,000
to $1,000,000 in 2002, less than 2 percent of the estates of individuals
dying each year paid estate tax. Despite the small amount of estates that
actually paid the tax, polls indicated that 17 percent of the general
population thought that their estates would pay the tax. Furthermore, a
majority favored repeal of the estate tax. In 2002, the House of
Representatives passed legislation that would have made the 2001 changes
permanent, but the Senate could not come up with 60 votes.
For several years,
Democrats in Congress have advocated a compromise short of a full repeal.
The estate tax would remain in place with a generous exemption (say,
$4,000,000 or $5,000,000). Such legislation failed to pass in 2001 and in
2002.
Another alternative
would be for Congress simply to reenact the 2001 legislation in 2003. This
would allow the “sunset” to occur in 2013, rather than 2011. In theory,
Congress could push back the sunset date annually.
The 108th Congress
began in January, and already several bills concerning the estate tax have
been introduced in the House of Representatives. The Death Tax Permanency
Act of 2003 would not make the death tax permanent; instead, it would make
repeal permanent by eliminating the sunset provision. The somewhat more
aptly titled Permanent Death Tax Repeal Act of 2003 would accomplish the
same goal. This or similar legislation almost certainly will pass the
House of Representatives by a wide margin. As in 2001 and 2002, the real
battle will be the effort to win 60 Senate votes.
In the Senate, the
Contract with Investors would not only eliminate the sunset provision, it
would accelerate repeal from 2010 to 2005. The Senate version of the
Permanent Death Tax Repeal Act of 2003 also would accelerate repeal to
2005. Passage of such acceleration seems unlikely, especially in the
Senate. A more realistic alternative may be the Dayton Fair Tax Cut Act,
which is a compromise that would retain the estate tax but increase the
exemption to $4,000,000 in 2007. Until Congress enacts permanent
legislation, we are stuck with the uncertainty of death taxes.
|
