Time to repeal? It's unclear whether estate tax will be repealed in 2010.

• Author: Katzenstein, Andrew M.
• Position: EstatePlanning

The tax planning community has patiently watched changes unfold to estate tax law since 2001 that have gradually reduced the rate and increased the exemption until 2010. at which time the estate tax would not apply. In 2011, the estate tax is scheduled to "come back" at old rates and with the old exemptions. With a little more than nine months left in 2009, we wonder whether we'll get to repeal in 2010 or whether the repeal would be made permanent for years after 2010.

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As it stands, if nothing is done, the estate tax is repealed for 2010. The gift tax will remain (there will be a 81 million per person lifetime exemption from the gift tax. and the annual gift tax exclusion will still be available to make transfers). For income tax purposes, the "basis step-up" at death will be limited in 2010.

To change this, Congress must pass a new law before the end of 2009 so that the estate tax is not repealed in 2010. While there is some talk about making this happen, no one knows what action Congress will take.

News reports indicate President Obama intends to avoid repeal in 2010. Instead, the 2009 S3.5 million exemption from estate tax and a 45 percent estate tax rate will become the law for 2010 and thereafter. Further, these reports suggest that there will be no inflation adjustment for the $3.5 million exemption.

Indeed, a number of estate tax bills have already been introduced in 2009. In the House of Representatives, four bills to permanently repeal the estate tax were introduced by Republicans, while Democrats introduced two bills to make the $3.5 million exemption and 45 percent rate permanent after 2009. In the Senate, Republicans introduced one bill to permanently repeal the tax. No action has yet taken place on any of these proposed bills.

The Obama camp has not introduced any bills on the subject, but during his presidential campaign, he stated that his intention was to avoid appeal in 2010. lock the exemption in at $3.5 million and lock rates in at 45 percent.

The Democrats have the votes to eliminate repeal in the House and have a significant majority in the Senate but not a filibuster-proof majority. To filibuster, however, would be a two-edged sword for Republicans. To accomplish repeal for one year (2010) using a filibuster. Republicans would need to block any action on the estate tax--which means that in 2011 the tax would come back at higher rates (55 percent) and with a lower exemption ($1 million). Are...