Estate and gift taxes have been a thorn in the side of the affluent for ages, while serving as an efficient stream of revenue for the federal government. Gift and estate taxes are two different types of taxes. Gift taxes apply to lifetime transfers of assets, while assets transferred at death are subject to estate taxes. [1] The Federal estate tax is levied “on the transfer of the taxable estate of every decedent who is a citizen or resident of the United States.” [2] The current status of the estate tax is governed by the Federal Economic Growth and Tax Reconciliation Act of 2001 (“EGTRRA”). [3] Under EGTRRA, the estate tax has a ceiling of 45% of an individual’s estate in 2007 through 2009, a ceiling of 35% in 2009 and is fully repealed by 2011. [4] However, a sunset provision means that if Congress does not reenact the relevant provisions of EGTRRA, the estate tax would continue in 2011 at a maximum rate of 55%, which was the rate before EGTRRA. [5] Currently, only estates greater than $1.5 million are subject to the estate tax. [6] Because Congress has yet to reenact the specific EGTRRA provisions, the future of the estate tax remains murky.
So what are the future routes the estate tax can take? One avenue would be to permanently repeal the estate tax. [7] Alternatively, Congress could reenact provisions of EGTRRA to extend the 35% rate until 2016 and continuously reenact the sunset provisions to lock in the 35% rate. [8] Another idea would be to retain the estate tax, but create a more generous exemption so that only estates greater than $5 million would be subject to the estate tax. [9] On that same note, the rate of the estate tax could be lowered to around 25% in hopes of negotiating a compromise. [10]
But what is the big stink about the estate tax? Studies show that the estate tax currently affects a mere two percent of estates. [11] Why has opposition to the estate tax been able to garner such broad public support, especially in times of worsening budget crises and economic hardship?
One answer lies behind the public policy that people should not be taxed on the fruits of their life’s labor, which involves fortunes set aside for heirs. [12] After all, the reason the decedent worked so hard was so that they could set aside wealth to provide for their heirs, right? Opponents, usually consisting of “small-business owners, farmers, trade associations and corporate lobbying groups like the American Council on Capital Formation,” [13] criticize the current system as a form of double taxation and suggest the tax fails to prevent the concentration of wealth, instead stifling economic growth. [14] According to a website operated by The Seattle Times Company, DeathTax.com, estate taxes are unreasonably high and force heirs “to sell their business, break up or liquidate their assets soley [sic] to pay the tax. This kills jobs and discourages owners from growing their businesses.” [15] The site also alleges that the estate tax does not effectively raise government revenues, hinders American businesses, costs Americans jobs, and that the national economy would be bolstered by a permanent repeal of the tax. [16]
On the other hand, proponents of the estate tax propose the obvious question – how could a tax that only effects a mere 2% of the population have such a detrimental effect on society? The repeal of the estate tax would decrease government revenues by an estimated $70 billion per year. [17] As for claims of double taxation, proponents counter that often the new wealth has not yet been taxed in the first place because the property reflected in the estate tax has often appreciated over time creating new wealth in which the taxing authority has yet to assert its jurisdiction. [18] Proponents of estate tax also further their views with policy arguments, suggesting a repeal would cause a harmful concentration of wealth, poor economic stability, and create an aristocracy. [19] It is also seen as unreasonable due to the small number of people affected by the tax.
In the face of worsening budget crises, wars in Iraq and Afghanistan, natural disasters such as Hurricane Katrina, and growing disparity between the rich and the poor, it would be both unreasonable and irresponsible for Congress to enact a full repeal of the estate tax. Repealing the tax would serve as a handout to the wealthy, at the expense of 98% of Americans. A far better solution would be to draft a generous exemption, but to require the taxpayer to meet specific criteria to take advantage of a more generous exemption. This would prevent small business owners and family farms from being torn apart as alleged by opponents, but would not hamper federal revenue collection at expense of lower and middle class Americans.
While states have begun to address the estate tax issue, the federal response remains unclear. For estate tax planners, the turbulence has only generated a greater need for services. [20] With discrepancies in state and federal law, estate planners are in even greater need to resolve ambiguities and plan for the future, appealing especially to high net worth families. [21] While the future of the estate tax remains uncertain, the field of estate planning is likely to continue to grow and taxpayers should stay tuned to political winds for the future of the estate tax.
Sources
[1] Edwin G. Fee, Jr., Maryland Estate Tax: Past, Present, and Future, 36 U. BALT. L.F. 105, 105 (2006).
[2] 26 U.S.C. § 2001(a) (2007).
[3] Fee, supra note 1, at 106.
[4] Id.
[5] Id.
[6] Edmund L. Andrews, Death Tax? Double Tax? For Most, It’s No Tax, N.Y. TIMES, Aug. 14, 2005, at C4.
[7] Fee, supra note 1, at 112.
[8] Id.
[9] Id.
[10] Id.
[11] Susan K. Hill, Leaping Before We Look?: Repeal of the State Estate Tax Credit and the Consequences for States, Americans, and the Federal Government, 32 PEPP. L. REV. 151, 158 (2004).
[12] Id. at 160.
[13] Andrews, supra note 6.
[14] Hill, supra note 11, at 160.
[15] DeathTax.com, The Death Tax is Killing Family Business, http://www.deathtax.com/deathtax/index.htm (last visited March 12, 2007).
[16] Id.
[17] Andrews, supra note 6.
[18] Id.
[19] Hill, supra note 11, at 158.
[20] Becca Mader, Death and Taxes: New Law Makes Future of Estate Tax Less than Certain, BUS. J. MILWAUKEE , Jan. 16, 2004, http://www.bizjournals.com/milwaukee/stories/2004/01/19/focus2.html.
[21] Id.