For the past 10 years, Congress has failed to enact an estate tax law despite several attempts to work out a compromise on the controversial issue. Everyone thought an agreement would finally be worked out in the last quarter of 2009, but because of its fixation on health care, Congress could never pass a bill.
The end result: There is no estate tax in 2010, at least for now. Nada. Nothing. So if the owner of a distributorship dies this year and normally would be subject to the estate tax regulations, no penalty would be assessed. His heirs would receive 100% of the estate.
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The failure by Congress to act is throwing financial planners and business owners into a major flux and shocked lobbyists who had expected an estate tax law to have been passed.
“Frankly, I was stunned. Shocked might be a better word,” says Jade West, the senior vice president of government relations for the National Association of Wholesaler-Distributors
in Washington, D.C. “No one believed that Congress would not do anything about this issue from 2001 into 2010. Everyone was expecting something to be completed.”
But worse yet, if nothing is done in 2010, the estate tax will soar to 55% next year on estates of more than $1 million.
To take a look at how this debacle occurred you have to look back to 2001. At that time, there was a 55% tax rate on estates valued at more than $1 million.
The Republicans, who controlled Congress at the time, wanted a repeal of the estate tax entirely, but a compromise was reached through reconciliation whereby the tax would be lowered gradually with a one-year repeal in 2010.
The tax would be resurrected in 2011 at the same level it was in 2001 if Congress failed to pass a permanent new estate tax.
Just three months ago, it looked as if an agreement would be reached. The House had passed a bill that would permanently freeze the estate federal tax to $3.5 million per person ($7 million per couple) and freeze the rate at 45%.
But in the Senate, John Kyl, R-Arizona and Blanche Lincoln, D-Arkansas, were pushing for a bill that would exempt the first $10 million of a couple’s estate and set the top rates on amounts over that at 35 percent.
No compromise was reached as Congress adjourned for Christmas vacation and everyone assumed it would be taken up in January. But nothing has happened.
Financial planners are in a quandary. Almost all business owners, including distributors, can’t make financial plans about their estates because no one knows what Congress will do. This uncertainty is creating problems for everyone, says West.
Worse yet, there is some movement in Congress to retroactively force taxes on estates that have already been probated. West, as well as many other political observers wondering whom the IRS would go after to collect those taxes. The estate may have been completed, and if they were to go after the heirs that wouldn’t be an estate tax but rather an inheritance tax. Some observers say a retroactive tax might be illegal.
“I honestly don’t know who they’d go after to pay,” says West.
Meanwhile, there are reports that the Senate could pass an estate tax bill this week and send it to the House for action. Stay tuned.
Jack Keough is a contributing editor to Modern Distribution Management and the owner of Keough Business Communications. He can be reached at firstname.lastname@example.org or by phone at 508-734-0029. Keough is the former editor of Industrial Distribution Magazine.