WASHINGTON ( TheStreet) -- The estate tax Congress delivered last month should exist only in a parallel universe.The problem is that this law, which creates structural changes and introduces needed concepts, is only temporary. We need permanence to provide stability and enable long-term planning.
|A good catch for a wealthy widow? Even if he's penniless, this man's estate tax exemption might be worth $1.75 million.|
The new law reduces the maximum estate tax rate to 35% and increases the exemption equivalent to $5 million for lifetime gifts and estates. This law "sunsets" in 2012, though. After that, the top estate tax bracket will go back to pre-2001 law, with a 55% maximum rate and an exemption of $1 million. Arthur Laffer's "Laffer Curve" explained how lower tax rates can result in higher tax revenue. Higher exemptions and lower rates decrease the incentive for estate planning, mitigating the loss of revenue. Because this law is temporary, though, the imminent return of higher rates and lower deductions actually increases the incentive for couples with assets over $2 million to do as much estate planning as possible now. This represents a lost opportunity for Republicans who favor lower rates and Democrats who want the rich to pay higher taxes, and for both who would like to reduce the deficit. Exemptions "momentarily" indexed to inflation
In a nearly meaningless move, the law indexes the $5 million estate tax exemption to inflation after this year. Because the law expires at the end of 2012, this will help only the estates of those dying that year. Indexing is a logical concept, and it works well in many areas of the tax law. This provision should have been made permanent.