– Est. –

The Bridge is Out! Senate Fails To Compromise on Estate Tax Fix

As reported in a recent article in TheHill.com, bipartisan negotiations over a potential compromise relating to the federal estate tax have broken down. According to Senate Minority Whip Jon Kyl (R-AZ), Senate Democrats are not allowing any legislation to reach the Senate floor which is not supported by a majority of Senate Democrats.

President Obama has previously proposed that the estate tax be continued at 2009 levels, with a total exemption from the estate tax of $3.5 million (potentially $7.0 million for a married couple) and with a top bracket of 45%. While the terms of the failed compromise were not released publicly, it has been reported from a number of sources that the compromise would begin at President Obama’s proposed levels, but then the exemption would increase over a number of years to $5 million with a 35% top bracket. In order to make the reduction deficit neutral, the Senate proposal would have also allowed individuals to prepay the estate tax during their lifetime at a rate of 35%. Presumably, this prepayment proposal would have been accomplished through some type of a “prepayment trust,” in which taxpayers would transfer assets to an irrevocable trust and pay the estate taxes in the year of transfer.

If Congress takes no further action on the estate tax (a possibility which I have discussed in a previous WealthLawBlog article), the estate tax will remain “repealed” for the balance of 2010, but then will return on January 1, 2011 with an exemption of only $1 million and a top bracket of 55%. Some Senators have stated publicly that they are in support of a reduced estate tax exemption. For instance,

Sen. Bernard Sanders (I-Vt.) recently stated: “The idea that we would make significant exemptions within the estate tax to give more tax breaks to the top three-tenths of 1% is nauseating. I will do everything I can to stop that.”

With approximately 11 “legislative weeks” for Congress to accomplish a “fix” to the estate tax, it seems to me that two things are becoming increasingly likely. First, the estate tax will likely remain “repealed” for the balance of 2010. Second, as the champagne flows and 2011 is ushered in, the “new” estate tax will return with the $1 million-55% parameters.