We’re just a few days away from witnessing something that was never supposed to be.  I have always cautioned client against expecting tax law to be logical.  In many areas of the law, the correct answer is the one that makes the most sense.  But tax law is driven by politics, not by common sense.

Even so, in more than 30 years of practicing law, I have never seen anything as absurd as what is happening now.  In 2001, a political compromise led to a temporary reduction in the federal estate tax.  Without the 2001 tax reduction, the amount exempt from federal estate taxation would have been $1,000,000.  The 2001 law temporarily increased that exemption through 2009, eliminated the estate tax for 2010 estates, and will reinstate the $1,000,000 exemption on January 1, 2011.

By its very nature, estate planning deals with uncertainty because so many life events will always be unpredictable.  How long will I live?  What health issues will I face?  What will my family look like?  What special needs will my beneficiaries have? Will anyone challenge my choices?  With all that uncertainty, having a stable, permanent, estate tax law helped keep the planning simpler, and therefore, less costly.  Since 2001, the task of developing estate plans that met our clients’ needs and objectives has been like trying to hit a moving target.  The estate tax uncertainty left us trying to plan around an infinite number of possibilities – a $1,000,000 exemption, an unlimited exemption, and anything in between.

Since 2001, most pundits have been certain that Congress would never let 2009 pass without amending this illogical tax law.  Even after Congress proved the pundits wrong, they remained convinced that Congress would act in 2010.  At the least, Congress was expected to allow 2010 estates to elect to use the 2009 law, since couples with a net worth of $7,000,000 or less fared better in 2009 than in 2010.  Still no action and only 2 weeks left in the year.

Sadly, Congress is not even discussing a permanent fix.  To the contrary, the only proposal currently being debated is whether to continue the uncertainty with another temporary fix – this one good for only 24 month.  Observing Congress’ 10-year failure to enact a permanent fix, the question is whether there is a political disincentive to do so.  The estate tax is a perfect wedge issue on both sides of the political aisle, giving rise to speculation that we will never have a rational and permanent solution.