Incredibly, it now appears Congress will adjourn without passing estate tax legislation, meaning there will be no estate tax imposed on individuals who die in 2010. However, the bad news is that, for 2011 forward, exemption amounts are only $1 million with maximum tax rates of 55 percent.
There was hope when the House passed a Bill extending the current $3.5 million exemption amount ($7 million for married couples who properly plan). However, it is now unlikely the Senate can reach agreement. Several Senators believe the exemption amount should be increased and estate tax rates should be reduced. Many were hopeful that the two sides would compromise – those wanting repeal would allow estate tax in 2010 in exchange for an increased exemption amount in 2011 forward. However, if compromise will happen, it may not happen until 2010.
Assuming Congress does not address estate tax reform until 2010, several issues arise. Presumably, any legislation would be retroactive, thereby inviting litigation from wealthy estates whose decedents passed away between January 1 and new legislation. Congressional leaders are considering issuing a public "letter of intent" that would indicate Congress’ willingness to address the issue next year (for whatever that’s worth). Second, if there is no estate tax, is it more difficult for members facing re-election to vote for a "new" tax? If so, does reaching a rationale solution to the problem become more difficult, meaning there is one year with no tax and subsequent years with only a $1 million exemption.
Finally, one issue not widely discussed if the estate tax is repealed is the elimination of the step-up in basis on inherited assets. In short, a capital gain tax would replace the estate tax on inherited assets. According to the Center for Budget and Policy Priorities, a think tank, these new taxes could affect many families that are now protected under current law. Ironically, those taxpayers hurt most would be the small businesses that need estate tax relief the most.