'Inadvertent' Repeal Of The Estate Tax

Congress Apparently Fails To Prevent Repeal Of Estate Tax In 2010

Late in the evening of December 16, 2009, the United States House of Representatives adjourned for the Christmas Break and is not scheduled to reconvene until January 2010. This means the estate tax and the generation-skipping transfer (GST) tax will be repealed as of January 1, 2010, as the Senate, although still is session, has yet to pass any legislation on retaining the estate tax in 2010. On December 3, the House passed H.R. 4154 which would permanently extend the current estate tax law with a $3.5 million exemption and 45% rate for estate, gift, and GST tax purposes. Although the Democratic leadership subsequently tried to move a two-month extension of the present transfer taxes in the Senate, it was unable to find the 60 votes necessary for the bill to be considered. Most, if not all, of the Republican Senators and some Democratic Senators (if they cannot achieve full repeal) would like to see an increased exemption, such as $5 million, and a lower rate, such as 35%. Even if the Senate acts before the end of the year (which is unlikely at best), the House would not be in session to consider any bill passed by the Senate. The only way that legislation could be enacted this year is for the Senate to pass H.R. 4154 without any changes to the House bill. Given the Senate's refusal to pass a two month extension, this seems highly unlikely.

Many believe that legislation to permanently fix the estate and GST taxes will be introduced in Congress early next year. However, because the current estate tax law will expire January 1, 2010, that expiration will undoubtedly create at least temporary uncertainty and confusion for many individuals in planning their estates. The longer that Congress delays in enacting a solution, the greater will be the uncertainty and confusion.

There are three possible resolutions to the current situation. First, if Congress fails to act next year, the estate and GST tax regime in place prior to 2002 with a 55% rate, a 5% surcharge on estates between $10,000,000 and $17,184,000, and a $1 million exemption will be reinstated on January 1, 2011. During 2010, the gift tax will still be in place with a $1 million exemption but a lower 35% rate.

Another possibly dramatic consequence of a failure by Congress to act next year will be the substitution of a carryover basis regime for the repealed estate tax. Under current law, a decedent's heirs receive assets...