Readers will recall that the Bush Congress passed an estate tax bill that decreased the rate and increased the exempt amount from 2001-2009, leaving last year's exemption amount at 3.5 million (meaning you wouldn't have to pay a penny of estate tax unless your estate was worth more than $3.5 million, and then you would only pay the statutory rate on amounts in your estate in excess of $3.5 million). Then the tax disappears for one year this year and spring back to life in 2011 exactly as it was in 2001 before the whole mess of tax cuts were passed ($1 million exemption and 55% rate). Those who put forward the plan back in 2001 were sure they'd just repeal the estate tax for good before 2010 came about. The spring back to life idea was just a gimmick to pretend that the tax cuts weren't going to cause deficits out the wazoo...
Now those deficits (and the ones we have because of the necessary government spending to counteract the recession caused by deregulation and casino banking) are here haunting us, so one has to ask whether it is wise at all to simply write off $30 billion or so in tax revenues a year by repealing the estate tax. The estate tax represents one of the best kinds of taxes--the decedent no longer needs the money, the beneficiaries have done nothing to earn it, and so having the government take a share that merely reduces the windfall to the beneficiaries is not a bad idea. This is especially true since the estate that are large enough to be subject to the estate tax at any rate that it is likely to be retained at are so few in number--very very few of us have estates worth the $3.5 million of the 2009 estate tax law.
So Congress is undecided what to do. There is, of course, a group of avid tax cutters who want to enact permanent repeal, come hell or high deficits. There is a more sane group of Congresspeople who are interested in considering the public good and not willing to enact one more giveaway for the extraordinaily super-rich at the cost of the economy and the ability of the government to fund necessary programs. Maybe the sane group will prevail, and we will end up with a reasonable estate tax. We might even end up with a progressive estate tax--an exemption amount of $2 million or so, with a rate of 45% on the first few millions over the exemption amount, 55% for some millions above that, and 65% on the estates worth hundreds of millions.
But until Congress acts, it leaves a peculiar situation today. People who have written wills assuming that there is an estate tax could find their wills having results far from what was intended if their deaths occur this year and there is no estate tax in place at all. That's because wills sometimes designates amounts to go to particular beneficiaries as the excess over the amount exempt from the estate tax or in other ways presuppose the existence of an estate tax.
Some states are taking action to avoid the problem of wills written with the wrong law in mind. See this article on Forbes.com by Ashlea Ebeling, States Race to Clean up Congress' Estate Tax Mess (Feb. 3, 2010) (also provides a good map showing 2010 state estate tax laws at this link). It notes that most of the changes are to provide a default rule that interprets wills and trusts during the period of estate tax repeal as follows: "Any tax terms or formulas should be read as if the estate tax law of 2009 were still in effect." Id. Most also permit potential beneficiaries to challenge the default rule in court.
And states that have state estate tax laws that piggy back on the federal estate tax law are now suddenly without a state estate tax. So New York, for example, has pending legislation to fix this problem, setting a $1 million exemption that is independent of the amount exempted under federal law. Id.
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