There is a whole lot to the estate tax, and there is even more as it relates to planning to reduce or eliminate estate tax exposure. And this post does not seek to get into most of these issues and strategies. But the real core issue as it relates to the Estate Tax and the national dialogue is that exclusion amount, and the volatility of it as a bargaining chip in Washington.
So the big question, and the nature of the swinging pendulum is the exclusion amount, where it will be, and as a result, how many people will the Estate Tax actually affect? Sure it is thought of traditionally as a tax on the wealthy, but with a $675,000 exclusion amount, that way of thinking isn't necessarily true, especially for someone who owns real estate in Southern California and has a life insurance policy.
Although I don't have crystal ball, one can find some insight by looking into the past, and extrapolating that into the future. Back in 2008, Senator McCain was campaigning for a $5,000,000 exclusion amount, which would be consistent with a conservative tax policy, subjecting less people to the tax. Then-Senator Obama was campaigning for a $3,500,000 exclusion amount, which is consistent with a liberal tax policy, exposing more people to the tax.
Upon being elected, Obama did let the Bush Era tax cuts continue until their expiration at the end of 2010. Facing a reversion back to the 2001 exclusion amount (adjusted for inflation, would then be $1,000,000), parties on both sides of the aisle agreed there certainly needs to be a negotiation or change. And on December 17, 2010, at truly the 11th hour, the "Bush Era" tax cuts were renewed, however, something very interesting occurred: President Obama reduced emphasis on the estate tax, conceding to the $5,000,000 exclusion in exchange for some Republican concessions on small business and payroll taxes, which the did concede to. When all the dust settled, the $5,000,000 exclusion lived another year, and then another, and at the end of this year, in two short months, we are in the same situation as we were in 2010: what will happen to the Estate Tax exclusion amount? Absent any congressional action, the exclusion will fall down to the $1,000,000 amount as is, but that will certainly not happen, as both parties, yes, even the most liberal among them, feel that $1,000,000 is to low, and would subject too much of the middle-class to the tax.
Although many people interpret the actions and statements of 2008 and 2010 differently, I feel that President Obama's concession, as a bell weather for his party's policy, acted as a ratchet or a new "floor" if you will. However, President Obama's tax plan for this 2012 campaign reflects a $3,500,000 exclusion, but without majority support in both the House and the Senate (something that is unlikely to happen this election), such a goal would most likely whither on the vine. Governor Romney, however, is campaigning for a complete repeal of the estate tax, which absent the 2010 exception, has not happened in over 100 years, also, something that will unlikely happen.
So what does 2013 and beyond hold for us? Well, I do have a prediction which I do reserve the right to change on the morning of November 7. I think regardless of the election, unless there is a massive swing in the makeup of Washington, we are looking at a $5,000,000 exclusion amount for the foreseeable future. Although the Democrats say they would like it to be lower, and the Republicans would like to do away with it altogether, I don't think either has the power to make such a drastic shift in either direction. What will be interesting though, is, of course, how the election will turn out, and how the Estate Tax exclusion amount will be used as a bargaining chip in this now all-too-familiar 11th-hour negotiation coming up in December. Either could affect my prediction, but only time will tell.