Repeal of the Estate Tax?

In 2001 Congress passed a law that imposed a ten-year schedule. The law gradually reduced the estate tax until 2010, when the estate tax would disappear. But the law then provided that in 2011 the estate tax would be again in place at a very high rate ($1 million exemption and a maximum rate of 55 percent when in 2009 the exemption was $3.5 million and the maximum rate 45 percent). It is safe to say that most people thought Congress would act before now. In fact the prevailing assumption was that Congress would extend the 2009 estate tax into 2010 and enact a long-term approach to estate tax this year.

Most estate planners and most business succession plans have been based on the assumption that there would always be an estate tax. The cardinal rule of business succession has been to not own a business at death. The burdens imposed upon heirs by the process of valuing and paying taxes on a business interest meant that owners have been motivated to sell business interests or engage in gifting programs they might not have otherwise done.

If Congress acts in 2010 and attempts to make the legislation retroactive, it will be challenged but the precedent is there for this type of tax legislation to be retroactive and valid. In U.S. v. Carlton, 512 U.S. 26 (1994) the Supreme Court upheld a retroactive application of tax law. It is unlikely that Congressional action in 2010 reinstating some form of estate tax as of the beginning of the year would be ruled invalid.

In spite of the uncertainty created by the failure of Congress to act, it still is a good idea to assume that the estate tax will be a part of the tax and business succession planning scenario and that dying owning a business interest still will be a very expensive mistake.