Redeal of the Repeal?

In the August 7, 2009, BNA Daily Tax Report, it was noted that Rep. Brady has proposed a permanent repeal of the estate tax.  Do you remember that old Saturday morning cartoon, I’m Just a Bill?  Well, this bill is going to continue to sit on Capitol Hill and will never become law.  You heard it here first.

So, what is to become of the repeal of the estate tax?  Most of those in the know seem to say that we are going to stay with the current $3.5 million exemption.  They are probably right.  However, I think it is dangerous to count on that happening.  Let me spell out for you a less probable, but possible scenario.

 Under current law, in 2010, the estate tax essentially goes away.  Then, in 2011, it comes back with a vengeance, at a $1 million exemption (thank you Senator Bird).  When this process was set up eight years ago, it was thought that there was no way a tax increase would be allowed, so the repeal would go on, regardless of the Bird Rule.  However, now we are in an economic crisis, and the government needs money. 

Many believe that the congressional leadership don’t want to see 2010 with the unlimited exemption, so we can expect finality this year.  It is possible, however, that the they will just punt this year.  With health care taking up the entire agenda lately, the congressional leadership could just extend the $3.5 million exemption for one year while they consider the matter.  They would likely get broad suppport for this extension.  Then, next year, they could decide that Bush’s plan was best after all, and just let the Bird Rule apply.  We would be back at a $1 million exemption without a vote for a tax increase.

You may be thinking the congressional leadership wouldn’t risk this because it affects too many of the voters, but keep two things in mind.  First, because of the recession, less people would be affected as less people will have taxable estates.  And second, the government needs money to finance the change America voted for.

Now, I agree this is not the most probable scenario.  But, it is at least possible, and because it is at least possible, we should consider it in our estate tax planning.