The House’s decision to extend the current estate tax rate did not come as a surprise to industry observers, who never believed the government would allow the tax to expire altogether and give up the much needed revenue.

As the estate tax law stands right now, “If you die on or after January 1, 2010 there is no estate tax,” said David A. Handler, a partner in the trusts and estates practice group of Kirkland & Ellis. Then, in 2011 the tax will revert to a 55% tax rate with a $1 million exemption—the rate that was in place before President George W. Bush took office in 2001. “Unless Congress does something we’ll have this weird whipsaw,” Handler added. “If you happened to die in one year rather than the other you’d have vastly different results.”

The House voted 225-200 on Thursday to extend the estate tax, setting it at 45% permanently for individual estates worth over $3.5 million instead of allowing the tax to expire at the end of this year and then revert to a higher rate in 2011. The exemption for married couples is $7 million.

Beth C. Gamel, an executive vice president at Pillar Financial Advisors, said that she thinks the 55% rate and $1 million exemption was “really onerous,” adding that the current estate tax rate is much fairer.

The worst part of the last few years, she said, was the uncertainty around what the future would hold.
 
“We can plan for anything as long as we know what we’re planning for,” said Warren Racusin, chair of Lowenstein Sandler’s trusts & estates practice group. “The biggest problem we have had in helping our clients plan their estates is that there has been no certainty on what the estate tax was going to be, whether their was going to be a tax and how extensive it would be if there was one.”
 
It seems that Congress decided it couldn’t afford to get rid of the estate tax all together given the United States’ record budget deficit of $1.4 trillion in fiscal year 2009 that ended September 30. Yet the reality is only 0.25% of Americans will be affected by the tax. Congressman Earl Pomeroy, who introduced the bill in the House, made sure of it. “By making the 2009 estate tax level permanent, we will make the estate tax go away for 99.75% of all. . .families, farmers, and small businesses in this country,” Congressman Pomeroy said.
 
But some Democrats believe the government should revert to higher estate tax rates, given the need for the extra revenue. If the current House bill passes in the Senate, the government stands to lose approximately $234 billion in revenue over 10 years.
 
Racusin said that the House made a political assessment that if the estate tax rate went up and the exemption decreased, that would be viewed as a tax increase. “I don’t think coming into a midterm election year that’s the political message they wanted to send,” he said.
 
In addition to maintaining the current 45% tax rate, the House bill does not include a number of loophole closures on estate taxes that would limit the use of certain techniques to discount the value of assets that President Barack Obama proposed in May. #