By Jeff Cook, President & CEO, Policy and Taxation Group

With families facing unprecedented uncertainty, the future of the estate tax on Capitol Hill remains an open question. After Congress passed the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) in 2001, the law slowly phased in a reduction of the rate to 45% and an increase of the exemption to $3.5 million through 2009 and temporarily repealed the tax in 2010. Due to the legislative procedure employed to enable passage, the law was scheduled to sunset in 2011, resulting in the potential return of a higher 55% rate and lower $1 million exemption absent further Congressional action. With few session days left remaining before Senators and Representatives head home to exclusively campaign for reelection, time is running short and competing priorities are numerous.

While almost anything could happen in the final moments of the 111th Congress, including during a lame duck session, three prospective outcomes remain most likely. First, Congress could pass a temporary extension of the estate tax at 2009 levels, potentially attaching the provision as a rider on another vehicle, such as the 2001/2003 middle class tax cut extension that House and Senate leaders have pledge to enact. With this approach, it is unclear whether Congress would seek to offset the cost of the proposal or whether it would apply retroactively. However, pressure has been building for fiscal discipline and support has begun to grow for a retroactive “election”, in which affected executors could choose either to step up basis and pay the estate tax or carry over basis for future capital gains.

Second and equally possible, with legislators divided on approach Congress could simply fail to reach agreement and allow the law to sunset (some are seeking higher taxes while others are pursuing further relief or a freeze at 2009 levels). This scenario would dramatically increase the burden and reach of the tax, potentially preserve repeal for decedents in 2010 and could reduce the likelihood of enactment of harmful revenue offsets, such as limitations on grantor retained annuity trusts (GRATs) or the elimination of valuation discounts. However, estate tax-related offsets could be implemented as part of legislation unrelated to the estate tax, particularly the GRAT provision that has already been included in several bills passed by the House.

Third and less likely due to cost considerations, Congress could send the President permanent estate tax reform. The House passed a clean freeze of 2009 levels without harmful revenue offsets in December (H.R. 4154), but since then Congress has enacted a strict statutory PAYGO law requiring most of the cost to be paid for (more than $250 billion). Meanwhile, Senators Blanche Lincoln (D-AR) and Jon Kyl (R-AZ) are exploring options to offer a floor amendment that would provide estate tax relief along the lines of a 35% rate and $5 million exemption. In this challenging budgetary and political environment, Policy and Taxation Group continues to press Congress to maximize the prospects of the best possible reform that provides certainty, permanency and sustainable relief and minimize the many risks families currently face.