Maryland Bar Bulletin
Publications : Bar Bulletin : January 2006

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Death and Taxes
By Edwin G. Fee, Jr.

If the only certainties are death and taxes, then why is there so much uncertainty about the future of the federal estate tax? The Economic Growth and Tax Relief Reconciliation Act of 2001 (the "Act") made substantial changes to the federal estate and gift taxes. Although the Act itself is clear, the future of the federal estate tax is anything but.

The federal estate tax exemption amount increased from $1,500,000 in 2005 to $2,000,000 in 2006. The maximum rate is 46 percent in 2006, and it will drop to 45 percent in 2007. The exemption will increase to $3,500,000 in 2009. Under the Act, the estate tax would be repealed in 2010.

In contrast to the estate tax, the gift tax will not be repealed in 2010. In addition, the current $1,000,000 gift tax exemption will not increase any further. The maximum gift tax rate is the same as the maximum estate tax rate. Upon repeal of the estate tax, the maximum gift tax rate is scheduled to be 35 percent.

Although the Act makes drastic changes, those changes will be reversed in 2011 unless Congress enacts further legislation prior to that time. The Act "sunsets" in 2011 due to a rule that requires 60 votes (out of 100) in the U.S. 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 would be reinstated with a maximum rate of 55 percent and an exemption of $1,000,000, and the maximum gift tax rate would become 55 percent again.

It is extremely unlikely that Congress would allow the estate tax to disappear in 2010, only to reappear in 2011. There are several 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 at that time indicated that 17 percent of the public thought that their estates would pay the tax. Furthermore, a majority of the public favored repeal of the estate tax. In every session of Congress since 2001, the House of Representatives has voted overwhelmingly in favor of full repeal. Such legislation has repeatedly failed to garner the necessary 60 votes in the Senate.

Another alternative would be for Congress simply to reenact the 2001 legislation in 2006. This would allow the sunset to occur in 2016, rather than 2011. Politically, it would be much harder for Congress to allow the reappearance of the federal estate tax after it has been repealed for six years. In theory, Congress could continue to push back the sunset date periodically.

For several years, Democrats in the Senate have advocated a compromise short of full repeal. The estate tax would remain in place with a generous exemption (e.g., $4,000,000 or $5,000,000). More recently, Republicans in the Senate have suggested reducing the maximum rate (e.g., from 46 percent to 25 percent). This retreat from advocating full repeal probably resulted from the realization that full repeal could not be paid for at a time of massive federal budget deficits. In the summer of 2005, the Republican leadership in the Senate declared that when Congress returned after the Labor Day recess, the Senate would vote on the future of the federal estate tax. It looked as if the Senate was about to reach a compromise.

Then Hurricane Katrina hit, and everything changed. The Senate vote was postponed for at least two reasons. First, it seemed insensitive to repeal a tax on some of the wealthiest Americans at a time when some of the most impoverished were suffering along the Gulf Coast. Second, huge federal budget deficits would swell even further due to the cost of reconstruction.

At this point, it appears that resolution of the debate over the federal estate tax will not occur until either the federal budget situation improves or Congress is forced to act due to the sunset provision in the current law. Until then, the future of the federal estate tax will remain uncertain.

For further discussion of the federal estate tax, see "The Uncertainty of Death Taxes," Bar Bulletin (Feb. 2003); "Is the Death of the Death Tax Greatly Exaggerated?" Bar Bulletin (Feb. 2002). For a discussion of the Maryland estate tax, see "New Unimproved Maryland Estate Tax," Maryland Bar Journal (Mar./Apr. 2005).

Edwin G. Fee, Jr., is a partner with Whiteford, Taylor & Preston L.L.P., and he is Chair-Elect of the MSBA Estate & Trust Law Section.

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Publications : Bar Bulletin: January 2006

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