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Might Congress have gotten something right?

Those of you who have read this blog know that, although I consider myself staunchly conservative in my political views, I also do not have a problem with there being an estate tax. Regardless of your political persuasion, the government must be paid for. Deficits, regardless of their cause, must be addressed, reduced and eliminated. There are always long-term and short-term solutions. One of those solutions is and seemingly will always be the estate tax.

As I have pointed out previously, the main objections to an estate tax are that, first, the government is taxing money that has already been subject to a plethora of taxes (e.g., income tax, sales tax, capital gains tax, production tax, gift tax, employment tax, etc.) and, second, that the tax is perceived as a tax "penalty" for being successful. Although I agree with both objections, I also realize that an estate is a place where the government can reap tax dollars with little or no objection. The person who earned the money will be dead and the beneficiaries can still revel in their often new-found wealth, even though it was received at the cost of a tax. Although it is quite numbing to see a family write a seven-figure check to the IRS for those taxes, they are still often left with a substantial windfall with which to console themselves. My objection to the tax as it was then existing was that the estate tax exemption -- which had always increased over time, was on the precipice of going from $5 million to $1 million. Even though President Obama's earlier proposal was to cut the exemption to $3.5 million instead of $1 million, it was still a decrease, thus subjecting estates which had previously not been subject to the tax to a tax at a 35% rate.

In an earlier post, I discussed what I referred to as the NIMBY approach -- Not In My Back Yard. The sentiment was that most people don't have a problem with the estate tax... as long as they don't have to pay it. Many liberal commentators were perplexed with wondering why anyone would have a problem with a tax that they would never have to pay, because their estates would never exceed $1 million or more. However, the common reasoning was that, based on the "American Dream" many people still clung to the possibility that, some day, they could be successful and thus did not want to have to bear that tax.

Considering both sides of the issue, Congress came to a surprisingly smart solution. The American Taxpayer Relief Act of 2012 ("ATRA 2012") didn't decrease the exemption... it INCREASED it. The current federal estate tax exemption is $5.25 million. It is indexed for inflation so that, over time, it will automatically increase without the need for Congressional approval or intervention. ATRA 2012 contains a portability provision so that the unused estate tax exemption amount of a deceased spouse will now be automatically available for the use of the surviving spouse. In other words, if I die with a $3.25 million estate, my wife gets to use my unused $2 million of remaining exemption, thus giving her $7.25 million that can avoid estate taxes. The bottom line is that a married couple can potentially and realistically leave a $10.5 million estate to their heirs without taxation. The only "poison" in that pill is that the former maximum marginal estate tax rate, which was 35% since 2010, was increased to a flat estate tax of 40% on all estate above the exemption amount. That means that anyone with an $10.6 million estate or with a $3 billion estate will pay taxes on the amount above the exemption at 40%. Of course, any and all estates passing to qualified charities will continue to be exempt from the estate tax. Is this a good and fair solution? I believe it is. Would I have preferred a complete repeal of the tax? By all means, yes! However, the tax is placed on individuals and estates that clearly can afford it. There had been (and continues to be) a lot of argument over President Obama's "promise" not to raise taxes on anyone making less than $200,000 (or $250,000, depending on which speech you listened to) per year and whether he breached that promise. There was also argument and objection that the $200,000 threshold was still offensive and objectionable because it touched what many perceive to be the "middle class." That is not a logical argument when it comes to an estate tax above $5.25 million or $10.5 million. Of course, there will still be those situations where families might be required to sell off assets to pay an estate tax debt. However, it is clear that a tax at that level will not decimate a family or leave them "wanting" when they still have more than $5.25 million - $10.5 million to allocate among heirs.

Like it or not, the estate tax is now a permanent part of our tax system. Congress did not just "kick the can down the road." They took a firm and surprisingly reasoned approach to arrive at a solution both sides can live with. I often have mentioned that when I started practicing law, the federal estate tax exemption was $175,000. Now in 2013, most people have a house and an IRA that exceed that amount. If the estate tax exemption was still $175,000, there would be horrendous pressure on Congress to do something. Depending upon inflation and depending on the success of our economy, the day could come when a $10.5 million exemption is not enough. However, I believe the rancor over the estate tax has been quelled for many years to come.


Good analysis. Only problem I see is that with an estate tax now firmly in place, the goal posts will be moved over time. The 40% rate will move up. the $10.5 million will go down. Future arguments will only be about "how much" the estate tax will be; the debate over having an estate tax is over. Haven't we seen this movie before?

Sure we have! I'll also be willing to wager we will see it again. However, even if Congress PERMANENTLY deleted the estate tax, and "We the People" pass a constitutional amendment outlawing it... it can still come back. My hesitant "elation" with current law is that it was approved by the Liberals! That might give them cause to think before changing their minds again. ("I voted for the bill.. before I voted against it.") A $5.25 million exemption will avoid taxation for most. Indexing it for inflation, will allow it to, hopefully, increase over time to address families whose wealth increases. With such Congressional deadlock as now exists, let's be glad we have this, instead of a $1 million exemption and a 55% marginal rate!

You really make it seem so easy with your presentation but
I find this topic to be actually something which I think
I would never understand. It seems too complicated and
extremely broad for me. I am looking forward for your next post, I will try to get the hang of it!

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