Riding the estate planning roller coaster for the next three years.

• Author: Stromsem, William R.

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The graph line of estate tax effective rates for the next three years would make an exciting roller-coaster ride. In 2001, the effective estate tax was set for a steady 10-year downward run, scheduled to reach a 45% maximum rate with a $3.5 million exemption in 2009 and then to be completely eliminated in 2010. In 2011, though, the tax is to be restored to the pre-2001 55% maximum rate with just a $1 million exemption.

When Congress set about reducing estate taxes in 2001, it faced self-imposed revenue neutrality requirements that would have been violated by a permanent elimination of the estate tax. At the time, most believed that a later Congress would eventually have to address the budgetary issue in order to prevent the eliminated taxes from being restored and to avoid the problems of carryover basis. (The legislation that phased out estate taxes provided for carryover of basis from a decedent to an heir when estate taxes were eliminated.)

As 2010 approaches, tax legislators and policy makers are sharply divided on a more permanent approach to taxing the transfer of wealth from one generation to the next. Although the AICPA had encouraged an early resolution so that planners could plan more effectively and clients could die more peacefully, this has not happened (see AICPA comments of April 3, 2008, March 11, 2008, June 22, 2006, July 28, 2005, May 9, 2005, and February 2001, available at http://tax.aicpa.org/Resources/Trust+Estate+and+Gift/Legislation/).

For those dying during the remainder of 2008 and most of 2009, the law will continue as is, with few legislative days left in this year and with the new Congress probably still in startup mode until next June. Congress procrastinated on extending tax benefits that had expired at the end of 2007 but finally got around to passing the extenders bill as part of the Emergency Economic Stabilization Act of 2008, P.L. 110-343.

Estate taxes are much more difficult, and Congress probably will not address the issue until the end of 2009, when it senses the urgency of avoiding the impending elimination/restoration/carryover basis fiasco. Hopefully, Congress will not make the ride even more thrilling by delaying action until 2010 and then trying to retroactively reinstate the tax after its elimination.

Into the Tunnel

As tax advisers try to plan ahead, the estate tax roller coaster is heading into an election-year tunnel, with no one knowing where the rates are going and...