The Wall Street Journal recently reported that Congress is contemplating a “prepaid” estate tax.  It is unclear exactly how such a model would work, but one scenario would allow people to create “prepayment trusts” in which they’d put assets into the trust for five years and pay a 35% capital-gains tax on the gains of the assets.  Then, when they die, the assets would presumably pass to heirs without any estate tax.

The benefit for the government is the creation of much-needed revenue now, but a big drop-off in collections later.

Could this work?  Possibly, but not for everyone.  People with liquid assets who can easily pay the taxes on their trusts would certainly benefit.  But for the average small-business owner with little to no liquid assets, it would obviously be more difficult.

Of course, we’ll be keeping an eye out for more developments on this.

In response to a budget crisis, the Delaware Legislature and Governor reinstated into Law the Delaware Estate Tax for people dying on or after July 1, 2009.  This new tax will be tied to the federal state death tax as it existed in January 2001 and applies to estates of $3.5 million or more.  After the elimination of the federal state death tax credit in 2005, one of the legacies of the Economic Growth and Tax Relief Act of 2001 (2001 Tax Act), over half of the states in the union lost their estate tax revenue, or they simply decoupled from the federal system altogether to prevent revenue loss.

For example, Virginia had a separate state death tax that they repealed.  This year, in Virginia, three bills have been introduced to create a new estate tax hoping to create over $100 million in revenue for the State.  All of these proposed bills have failed to pass in the legislature.

What this all means:  States facing large budget deficits along with the growing economic challenges are once again looking at “estate taxes” as a means to buffer or balance their budgets by taxing the deceased.

As always, we will be following all of the local jurisdictions in regard to their estate tax laws.  Currently, as stated above, Virginia does not have an estate tax, while Maryland and D.C. both have an estate tax on estates valued at over $1.0 million.