As Congress heads toward its summer recess, it looks unlikely that legislators will make progress any time soon on the estate tax. That leaves financial planners and their clients in the lurch.
As Congress heads toward its summer recess, it looks unlikely that legislators will make progress until September — or perhaps even after the midterm election in November — on the estate tax.
“The Senate is probably going to limp into the August recess, accomplishing nothing with respect to taxes,” said Clint Stretch, managing principal of tax policy at Deloitte Tax LLP. “This uncertainty is going to continue until the end of September. It might continue until December.”
A proposal by Sens. Blanche Lincoln, D-Ark., and Jon Kyl, R-Ariz., to set the estate tax rate at 35% permanently — and allow a $5 million exemption — probably won't see action in the Senate before the chamber's members head home Aug. 6.
Ms. Lincoln and Mr. Kyl had hoped to attach their provision to a small-business-lending bill that is currently on the Senate floor. Their measure, however, appears to be falling short of the 60-vote threshold required to overcome a filibuster.
“In some ways, this is sort of a lost cause,” Phillips Hinch, assistant director of government relations at the Financial Planning Association, said of the Lincoln-Kyl proposal. “[Senators] know that this doesn't look like the vehicle that gets [estate tax] across the finish line.”
Currently, there is no estate tax. If Congress fails to act by Dec. 31, the rate will revert to 55%, with a $1 million exemption. The House did pass a bill late last year that would permanently set the estate tax rate at 45%, with a $3.5 million exemption.
But there's been little movement on revising the death tax in the upper chamber. The Senate Finance Committee held a bipartisan closed-door meeting last week. The committee, headed by Sen. Max Baucus, D-Mont., indicated that it would take up the estate tax in September.
“Chairman Baucus understands the importance of providing tax certainty for Americans planning their estates, which is why he continues to work with his colleagues on both sides of the aisle, in the House and the Senate, to develop a viable, fiscally responsible proposal that addresses the estate tax expiration quickly, and in the most complete and permanent way possible,” said a Finance Committee aide.
Nevertheless, some of Mr. Baucus' colleagues may not yet feel a sense of urgency in dealing with a tax that affects relatively few voters. “In Congress, it really hasn't sunk in that it's a problem,” Mr. Hinch said.
Investment advisers, on the other hand, are keenly aware of the issue.
“The estate tax is a massive problem,” said Jeff Fishman, president of JSF Financial LLC. “I've never seen a situation more unsettled and more unclear that the estate tax right now. It's just complete chaos. No one thought it would get to this point.”
Currently, heirs don't have to pay any federal estate tax. It's possible that Congress will establish a retroactive tax for this year. But getting clients to make a move — one way or the other — is a tough sell for advisers.
“It's hard to get our clients to take action when there's so much unknown,” said Paul Strebel, a partner at The Strebel Planning Group. “They say, ‘I don't plan on dying before the resolution of the estate law.' They stall. They procrastinate.”
Mr. Stretch foresees congressional action if for no other reason than constituent pressure. He notes that in Connecticut, California and New York — home to six Democratic senators — many estates have zoomed past the $1 million threshold because of the huge appreciation in housing prices over the last 40 years.
Letting the tax revert to 55% with a $1 million exemption “would be a bad thing for many important Democrats,” Mr. Stretch said.
