The fate of the federal estate tax likely lies in the results of the next election. Here are the most probable scenarios.
If you’ve been following the political saga of the estate tax over the past few years then you know it’s coming to a head… again. In fact, the estate tax may very well be amongst the largest and most divisive topics as we sink deeper into the current election cycle. It’s hard to say which way it will fall, or if it will stay there for long, and that just makes estate planning a bit tricky.
Even if it’s hard to say what will happen, there still are some fairly likely situations that may occur and with very different consequences. It’s worth thinking systematically, or at least understanding your odds, and in that vein I found a recent article laying out four possibilities.
- Gridlock. Each party pushes and pulls and yet there is no victor, and so we all lose. That is to say that if the current law isn’t extended, updated, or changed, the compromise deal reached in December of 2010 will sunset and the law will revert all the way to pre Bush tax-cuts at a whopping maximum 55% tax over the $1 million exemption. That’s higher than a number of pro-tax advocates care to call for, especially given the inflation of some ten years. That said, Congressman Jim McDermott of Washington has put just such a bill into the works, with those rates and exemption amount indexed for inflation.
- Stalemate. Perhaps no one will win but no one will want to lose, and receive their self-inflicted pain, either. Instead of failing to pass any measure they can simply extend what we have now. President Obama signed it once already and it’s a far better deal than most anti-tax representatives have seen before or since the lapse in 2010.
- Democrat control. In many ways it’s fairly difficult to say what this would amount to since there are more pro-tax representatives amongst Democrats but few that are so concerned as to return to steep taxation. To take President Obama as a cue, it may mean a return to a higher rate (somewhere between the current 35% and 55%) to add a bit more edge, but also a higher exemption amount to cut into fewer estates.
- Republican control. Especially if there is a Republican in the White House sometime soon, there’s renewed possibility of dropping rates and exemptions or even a lapse of the tax entirely. Of course, even with most of the legislative and executive branches there is a growing political furor over the taxation of wealth – even certain potential Republican candidates are voicing these concerns – and the estate tax is an easy target.
In the end, 2012 will be about keeping one eye on the ebb and flow of politics, even if it is a particularly rapid current these days, and intelligently planning. After all, having plans in place won’t hurt if the estate tax does pass on into legislative history, but the other way around can bring some pain. For that matter, the estate tax isn’t the only impetus for a solid plan for the distribution of wealth.
Reference: Producers Web (January 17, 2012) ”4 potential scenarios for the future of the estate tax”