Bickering Senators Delay Estate Tax Fix

More chest-pounding tactics between lawmakers imperil speedy resolution for long-term estate tax repair.  Senator Baucus’ office told us deal is far from complete.

With Democratic leadership and Republicans blaming each other, it looks like negotiations to roll back the currently repealed federal estate tax to 2009 levels when it kicks back in next year have been wrecked.

A staffer in Finance Committee chairman Max Baucus’ office told me that “Republican objections” had stalemated recent progress toward estate tax clarity.

Since the deal would have given Republicans just about everything they’ve asked for, including a $5 million exemption (rising with inflation) and a 35% maximum rate, those objections were more about Senate procedure than the tax code.

From the Republican camp, John Kyl of Arizona, Senate minority whip, threw the blame back across the aisle.

“We no longer have an agreement,” he told reporters, “because the Democratic side has decided that unless a matter has a guaranteed majority of Democratic votes going in, they’re not going to allow it on the floor.”

Reading between the lines

What Kyl means is that while Baucus and other leading Democrats been ready to deal, many rank-and-file party members would probably balk any serious estate tax overhaul until after the November elections.

If the Senate does nothing, the tax resets on January 1 with an exemption of $1 million and a maximum rate of 60%. Senator Bob Casey of Pennsylvania estimates that maybe 80% of his fellow Democrats are willing to let this happen because, in his words, tax relief for wealthy families looks “offensive” given massive federal revenue deficits.

As the Baucus aide told me, it boils down to not enough votes even if all Republicans are on board. “He understands the political realities of what can pass the Senate,” she says.

Estate planners are disappointed, but not surprised.

“It can be almost impossible to cut through the Washington chatter, but it’s basically shenanigans as usual,” says New York attorney Martin Shenkman. “The underlying mood is that tax rates across the board are rising, and estate tax is part of that conversation,” he added.

Shenkman wouldn’t be stunned to see the Senate run out the clock and let the exemption reset at $1 million, even though that would expose about seven times as many families to estate tax liabilities.

Of course, that would keep Shenkman and his peers busy. Wider estate tax concerns naturally feed interest in trusts and other estate planning vehicles designed to reduce the size of a taxable estate, minimizing the eventual IRS bill or eliminating it altogether.

Paying the death tax in advance

Early gossip around the now-stalled deal focused on whether it would give people the option of paying estate tax while they’re still alive.

On the surface, the idea of transferring property into what Kyl calls a “prepayment trust” is interesting, not to mention a potential growth business for trust companies.

But in practice, there doesn’t seem to be a compelling argument for wealthy families to assign their assets to one of these vehicles and pay their estate tax in installments when they can simply go with an old-fashioned irrevocable trust instead.

While Kyl will probably keep pushing the idea in future negotiations, it’s probably not going to go anywhere.

Likewise, talk of restoring the estate tax in 2010 and making it retroactive to the beginning of the year seems to have fizzled out. Every day the Senate drags out the process makes any retroactive tax a bigger headache for executors. If we don’t get any action before November, the odds drop to near zero.

Nobody expected things to drag on as far as they have. “It’s incredible that Congress had nine years to fix this and not only waited until the deadline, but went past the deadline,” says Jonathan Siegel, a law professor at George Washington University.

“They’re like college students who waited until something was due and then pulled an all-nighter,” he added. “That’s too crazy, even for Congress.”

Scott Martin, contributing editor, The Trust Advisor Blog.

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