A New York Times article published on June 8, 2010 reveals that real dollars are at play as the Estate Tax mess unfolds in Congress. In late March 2010 Dan Duncan of Houston Texas died leaving his four children and four grandchildren $9.0 billion. He made his money by leveraging $10,000 and two propane trucks into a network of natural gas processing plants. If the law remains as is, and no retroactive reinstatement of the Estate Tax is enacted, Mr. Duncan’s heirs stand to save billions of dollars in Federal Estate Taxes. While it is now anyone’s guess, until recently the general consensus was that Congress would reinstate the Estate Tax in some form and do so retroactively to January 1, 2010. It was expected that Estates affected by the retroactive effect of the tax would challenge the law on constitutional grounds. Now, it seems a certainty that at least one taxpayer will go to Court if the Congress enacts a retroactive Estate Tax.
I provide you the following information with no further comment because, as one colleague told me, we don’t provide advice to the aggregate population. We do so for individuals and the bite of the Estate Tax is no less sharp because it affects so few Estates or its effective rate is low.
In late April, 2010 the Congressional Research Service (“CRS”) published a report authored by Jane G. Gravelle entitled “Estate Ta x Options.” This report measured the probable effect of the three most talked about views of the Estate Tax landscape in 2011 and beyond. President Obama in his 2010 and 2011 Budget Outlines proposed to freeze the Estate Tax at its level in 2009; that is: an exclusion amount of $3.5 million and a 45% Estate Tax rate. Those Senate Republicans who did not want an outright repeal of the Estate Tax proposed an exclusion amount of $5.0 million and a top Estate Tax bracket of 35%. Both these proposals were compared with maintaining the status quo without new legislation; that is: $1.0 million exclusion amount and a top Estate Tax rate of 55%.
The CRS Report stated that very few estates would be touched by the Estate Tax, regardless of which scenario prevailed. For example, less than two (2%) percent of all Estates would pay an Estate tax in 2011 under any scenario, and that number grows to a mere three (3%) percent in 2019:
· Of the projected 2.5 million new Estates in 2011, only 44,230 Estates (1.76%) would pay an Estate Tax if the current law were to remain in effect.
· Of the projected 2.5 million new Estates in 2011, only 6,420 Estates (0.25%) would pay an Estate Tax if the $3.5 million exclusion amount were enacted
· Of the projected 2.5 million new Estates in 2011, only 3,560 Estates (0.14%) would pay an Estate Tax if the exclusion amount were raised to $5.0 million.
The passage of time and effects of inflation will modestly increase the number of Estates affected in 2019. If the current law remains unchanged (i.e., $1.0mm exclusion amount) into 2019, three (3.0%) percent of all Estates will pay an Estate Tax and less than one-quarter of one (0.23%) percent would pay if the exclusion amount were increased to $5.0 million.
Nor are the dollars raised by the Estate Tax large in comparison to other tax levies, such as the Income Tax. Under the current law, if the exclusion amount returned to $1.0 million and the highest Estate Tax bracket were 55% then the Treasury would raise $34.4 billion in 2011 and $62.2 billion in 2019. As could be expected, the amount that is projected to be raised diminishes as the exclusion amount increases and the top rate decreases. Thus, if the exclusion amount increases to $5.0 million and the rate is reduced to 35% the Estate Tax would raise $11.2 billion in 2011 and $20.9 billion in 2019.
In another conclusion, the CRS Report notes that because of various deductions and exclusions the effective tax rates on estates are much smaller than the statutory rate. For instance:
- The effective tax rate on a $3.5 million Estate subject to a 55% tax rate and entitled to a $1.0mm exclusion amount is twelve and nine-tenths (12.9%) percent
- The effective tax rate on an estate over $20.0 million subject to a 35% tax rate and entitled to a $5.0 million exclusion amount is sixteen and one-half (16.5%) percent.
Finally, a curiosity from the June 11, 2010 issue of the Wall Street Journal. The WSJ reported that there are now 11,200,000 millionaire households worldwide; a figure up by fourteen (14%) percent since 2008. Further, the bottom eighty-three (83%) percent of world households own thirteen (13%) percent of the world’s wealth; whereas the top one-half of one (0.5%) percent of households (those with a net worth of $5.0 mm or more) own twenty-one (21%) percent of the world’s wealth, up from nineteen (19%) percent in 2008.