The political climate in our country changed substantially on November 7, 2006. The Republican control of Congress has shifted to the Democratic Party. Many clients have asked whether this shift in political control will affect their current estate plan and estate tax liability. I personally expect there will be major changes to our current estate and gift tax rules during the next few years.
On May 26, 2001, Congress passed the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). EGTRRA has always been criticized, however, for its inadequacies and lack of permanent tax relief. A major criticism of EGTRRA is its one year repeal of the estate and gift tax and the expiration or “sunset” of EGTRRA on January 1, 2011, where the rules will revert back to pre-EGTRRA rules.
Due to these and many more inadequacies, every year since the passing of EGTRRA, the Republican-controlled Congress has submitted a permanent repeal of the “death tax,” which has failed each time.
During 2006, Congress tried two new approaches, entitled “The Permanent Estate Tax Relief Act of 2006” and “The Estate Tax and Extension of Tax Relief Act of 2006.” These acts attempted to provide permanent tax relief through increased exemptions and lower tax rates rather than a complete repeal of the estate tax. Unfortunately, both attempts failed.
Therefore, we are currently in limbo with the possibility of a one year repeal of the estate tax and reversion back to the pre-2001 death tax rules in 2010 and 2011 respectively. I think both the Democrats and the Republicans agree this should not be allowed to happen.
The ramifications that would be present during 2010 (the only year the estate taxes are repealed) could be alarming. Families may be forced to make a decision to keep a loved one on life support alive based financial and estate tax benefits, euthanasia could become more common in our country in the name of taxes, politicians could take substantial heat for providing only a one year repeal window and not fixing the problem.
Therefore, it appears that our newly elected Congress will not allow EGTRRA to reach its one year repeal year and subsequent expiration. During the next two to three years, they will have to make some concessions and work with the Republicans to propose and pass a permanent estate tax relief act, probably with lower exemptions and higher tax rates than the Republicans previously proposed. What is certain is that a change is coming.
If you have any questions regarding family based estate and tax planning or any other legal issues, please do not hesitate to call Rowley Chapman Barney & Buntrock, Ltd. at (480) 833-1113, and ask for Ken Barney.
