For many of us, the existing estate tax is not a big deal. If we die, and our estate is worth, say, a million dollars or less, the estate tax passes us by. But the estate tax does touch a lot of Americans in a painful way -- most particularly, small business owners who often face having to sell the family business in order to pay the estate tax, instead of being able to keep the business in the family. Businesses such as farms, auto dealerships, and restaurants are often vulnerable, as they tend to have significant assets but not big piles of cash.
Congress agreed to phase out the estate tax (cannily referred to as the "death tax" by opponents) several years ago. The exemption that's currently $1.5 million is scheduled to rise to $3.5 million by 2009 ($3 million and $7 million, respectively, for married couples), as the top tax rate drops from 48% today to 45%. In 2010, the tax is repealed, but unless that provision is extended, it oddly expires the next year. (So take note -- for those with a lot of money, 2010 is looking like a profitable year in which to die. Just kidding!)
Lobbyists are hard at work in Washington; many trying to make the repeal permanent. But one current obstacle is our federal deficit, which is massive and only expected to increase in the near future. In such an environment, it's difficult to think of doing away with money maker of around $20 billion in revenues annually.
What's the answer? To many, simply raising the exemption even more makes a lot of sense. This has been suggested by none other than Bill Gates, Sr., father of Microsoft (NASDAQ:MSFT) founder and world's-richest-man Bill Gates, as well as Paul Volcker, former chair of the Federal Reserve.
Meanwhile, we're best off assuming that the tax may still be around when we expire, so we should plan accordingly. Some small business owners, for example, take out hefty life insurance policies to enable their heirs to pay the tax. For an interesting take on the topic from some wealthy thinkers, check out Wealth and Our Commonwealth: Why America Should Tax Accumulated Fortunes by William H. Gates and Chuck Collins. And consider yourself invited to share your thoughts on our discussion board.
Longtime Fool contributor Selena Maranjian owns shares of Microsoft.
