Death of estate tax may be premature

If the Senate follows the U.S. House before year’s end, it can remedy a serious problem with the federal estate tax that’s brewing for next year and 2011.

Under tax cuts enacted during the Bush administration, the estate tax rate — the rate paid to the federal government when a wealthy individual dies and the estate is passed on to the heirs — gradually declined from inordinately high levels to nothing.

Nothing is how much an estate will be taxed if someone dies next year, unless the law is changed. But, because of a compromise hammered out to win votes for the tax cut, the changes in the estate tax sunset in 2011, meaning the tax will jump back up to 55 percent on any estate valued at $1 million or more.

Both of those circumstances are untenable. Rich individuals who die next year shouldn’t be able to transfer all of their assets to their heirs — without paying taxes — simply because they happen to die at the right time. It leads to the perverse outcome of creating a significant incentive for a wealthy person to die by Dec. 31, 2010.

On the other hand, those who worked hard for a lifetime to build up small businesses or farms valued at $1 million or more — and paid taxes on income as they did so — shouldn’t have to worry that more than half the value of their assets will go to the federal government if they die in 2011 or thereafter.

A bill passed by the House last week would rectify both of those situations. It would restore the estate tax for next year and into the future. But it would substantially change it from the rules that are scheduled to take effect in 2011. It would set the estate tax rate at 45 percent, and would require that it be paid only on estates valued at $3.5 million or more ($7 million for couples).

Although some people have long wanted to eliminate the estate tax entirely, many who voted to alter the tax early in this decade wanted primarily to change it so it didn’t affect so many small family businesses with such confiscatory rates. The House bill will do that. The Senate should adopt the House measure.


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