Written by Jeffrey Skatoff • December 17th, 2009
Recent attempts to fix the impending repeal of the estate tax and subsequent re-enactment at higher rates have been reported by the New York Times, in Carl Hulse's article, Estate Tax Is Expiring, but Death Won’t Last.
Under the Economic Growth and Tax Relief Reconciliation Act of 2001(EGTRA), the estate tax rates and exemption amounts have been sliding lower, from a top rate of 55% and an exemption amount of $1 million in 2001, down to a top rate of 45% and an exemption of $3.5 million in 2009. This change has reduced the number of taxable estates by 90%, some commentators have estimated.
Under current law, in 2010, the estate tax vanishes. Due to budgeting rules in place in 2001, Congress was required to reinstate the 2001 estate rules for the year 2011 and beyond. So, in 2011, current law would take us back to a 55% estate tax rate and an exemption amount of only $1 million. This change would ensnare hundreds of thousands of estates annually that are currently free of estate tax.
Practitioners in the estate field have been assuming that Congress would at some point during 2009 (and certainly well before the week before Christmas) enact a new statute preserving the estate tax in 2010, and reducing the otherwise draconian rate and exemption structure scheduled to go into effect on January 1, 2011. Professor Edward J. McCaffery's, The Politics of Estate Tax Reform, has an explanation of the politics behind the estate tax.
What happens to the estates of those who pass away in the first part of 2010, before a new estate tax law is put into place later in 2010? For those of you thinking that such estates will pass without estate tax, such a result is doubtful. This situation has happened before, with a retroactive rate increase that was imposed on persons who passed away prior to the passing of the rate increase.
Provided that the retroactive application of a statute is supported by a legitimate legislative purpose furthered by rational means, judgments about the wisdom of such legislation remain within the exclusive province of the legislative and executive branches . . . .
To be sure, . . . retroactive legislation does have to meet a burden not faced by legislation that has only future effects . . . . “The retroactive aspects of legislation, as well as the prospective aspects, must meet the test of due process, and the justifications for the latter may not suffice for the former” . . . . But that burden is met simply by showing that the retroactive application of the legislation is itself justified by a rational legislative purpose.
United States v. Carlton, 512 U.S. 26, 30 (1994)
In other words, if Congress wants to raise money by raising taxes retroactively, the Supreme Court is not going to stand in its way.