2010: An Estate Tax Odyssey

R. Scott (Scott) Johnston is a partner in our New York office.

Congress is in the midst of one of its most challenging periods in history. On its agenda are health care reform, wars in Afghanistan and Iraq, job creation and other economic stimulus efforts, regulation of the financial services industry, and solvency of Social Security and Medicare. Facing unsustainable fiscal deficits, Congress must find ways to raise additional sources of revenue without stalling a fragile economic recovery.

Against this backdrop, it is understandable that legislators have been unable to reach a consensus on the shape and form of the estate tax. Under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the federal estate tax exemption increased during the past decade from $1 million to its present level of $3.5 million and the maximum rate decreased from 55 percent to 45 percent. In 2010, EGTRRA would provide the ultimate relief from the estate tax – a full repeal. This relief would be short-lived, however, as the estate tax is to be reinstated in 2011 and it returns with a vengeance given that the exemption is scheduled to revert to $1 million. While commentators have been hesitant to predict what action Congress may take on the estate tax, almost all have agreed that the repeal of 2010 will not be allowed to go into effect.

The Estate Tax Debate

Despite the many crises facing Congress, there has been considerable debate over the estate tax.

Those against the estate tax argue that:

it unduly endangers many family-owned businesses and farms considered the backbone of the U.S. economy it creates a disincentive in the form of double taxation to entrepreneurs it is an extremely inefficient mechanism for raising revenues Those in favor of the estate tax contend that:

inherited wealth stifles the incentive of future generations to become economically productive members of society those who have benefited most from our economy should bear a disproportionate share of the tax burden the estate tax serves as an offset to some of the more regressive forms of taxation such as sales taxes and payroll taxes Both sides of this debate have some merit and some folly.

The rhetoric of debate has been translated into several bills that are before Congress. (A chart is included at the end of this article summarizing some of the more significant provisions of each bill.) These bills provide a range of exemptions from a minimum of $2 million to a maximum of...

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