The fate of the federal estate tax

It appears that Congress will not act to reinstate the federal estate tax before the end of 2009.  Accordingly, it may seem that from an estate tax perspective, 2010 would be a good year for the wealthy to die.  Remember, survival until 2011 would mean a tremendous tax increase which cannot even be placed in percentage terms because any tax is infinitely higher than none at all.

But, will the wealthy dead of 2010 actually get the benefit of the zero tax?

According to Carl Hulse, Estate Tax Is Expiring, but Death Won’t Last, NY Times, Dec. 17, 2009: 

Democrats are vowing to resurrect it as soon as Congress returns in 2010. Even its most ardent foes acknowledge that some accommodation will have to be reached because the tax is now scheduled to rise from the grave, zombielike, with even more reach in 2011. * * *

There is yet another wrinkle. When they scheduled the demise of the estate tax for 2009, the authors of the 2001 tax measure replaced it with a capital gains tax of 15 percent on inherited property that is later sold.

The threshold for being subject to those taxes is set lower, with the first $1.3 million in capital gains exempted for general heirs and $3 million for spouses. Democrats argue that thousands of estates that would not have been subject to taxes under the current law could get hit in 2010 even as those at the higher end of inheritance scale escape the 45 percent tax bite. * * *

Democrats hope to make the situation moot by restoring the current tax and making it retroactive to Jan. 1. Republicans would like to negotiate a new tax structure, perhaps taxing eligible estates at the 15 percent capital gains rate.

Special thanks to Matthew Bogin (D.C. & Maryland) for being the first of many readers to bring this article to my attention.