Regardless of the outcome of the 2012 elections, Congress and the future president are likely to settle on a permanent estate tax in 2013 because of the need to bring the burgeoning budget deficit under control.
This was the consensus of a panel of experts during "Washington Report Live," a highlight of the annual meeting the Association for Advanced Life Underwriting (AALU), being held in Washington, D.C. April 29-May 2nd. The panelists–AALU Counsel members Jeff Ricchetti, Ken Kies and Bill Archer; Chris Morton, AALU vice president of legislative Affairs; Justin Brown, an assistant vice president of legislative affairs; and the moderator, Marc Cadin, a senior vice president of legislative affairs–prognosticated on a range of tax and regulatory issues that the AALU will seek to influence through advocacy efforts in the year ahead.
Morton said that achieving a successful outcome with the estate tax remains a top priority for the AALU, alongside maintaining the tax-favored treatment of life insurance and reducing regulatory burdens on insurers and producers.
"We've invested significant time, energy and dollars into fighting off repeal of the estate tax and insuring sustainability in the estate tax arena," he said. "We're informing members of Congress on the trade-offs that will result by adopting one or another exemption level and top tax rate. And we're educating them on the need for certainty by making whatever estate tax regime is adopted permanent."
When asked to forecast Congressional action on the estate tax in 2013–the earliest likely time frame given the current election season–Ricchetti said that legislators will likely achieve consensus on the estate tax regime of 2009: a $3.5 million exemption level and a 45% top tax rate. These numbers, he said, would be a reasonable compromise between the current regime ($5 million per individual exemption and top tax rate of 35%) and the the pre-2001 tax regime which, absent Congressional action, the law would default to ($1 million per individual exemption and a top tax rate of 55%).
A key factor favoring the 2009 levels, Ricchetti added, is the $100 billion in revenue to be generated over 10 years compared to the exemption levels and tax rates under current law. He cautioned, however, that the direction of estate tax policy will be ultimately be determined by the outcome of the 2012 election.
Kies added that growing pressure to bring the budget back into balance will keep the estate tax in force, regardless of the election results.
"The pressures to be fiscally responsible will be intense, even with an all-GOP sweep of the White House and Congress," he said. "So the prospect of a permanent set of estate tax rules–between a $3.5 and $5 million exemption level and between a 35% and 45% top tax rate–is a reasonable prediction."
Archer however, questioned whether any compromise agreed on by a GOP-controlled House can garner support in a Senate with a Democratic majority. If the two houses remain divided along party lines come 2013, he said, then continuing gridlock on the issue is possible.
Turning to a provision in the president's budget affecting grantor trusts, Morton said the proposal would "dramatically change" how the estate planning vehicles are used. The reason: The provision would coordinate the income and transfer tax of grantor trusts so that estate and gift taxes are imposed on the trust based solely on the trust's status.
"This is a significant departure from current law," he said. "The proposal would dramatically and adversely alter the economics of most life insurance and estate plans, including the transfer tax treatment of preexisting trusts. We're are drafting a letter to the Treasury Department articulating the concerns we have on this issue and probably will meet with Treasury officials."
