There may be 27 calendar days left, but there are only 16 Planning Days left before the fiscal cliff!

It may be too late to do anything, so what are the possible outcomes for the estate tax? As I see it, here are the three most likely outcomes for the Federal Estate Tax on January 1, 2013:

Estate Tax Exemption

Gift Tax Exemption

Maximum Rate

Current Law

$5,120,000

$5,120,000

35%

Back to 2009

$3,500,000

$1,000,000

45%

Back to 2001

$1,000,000

$1,000,000

55%

Keep Current Law:

The punt solution. Congress and the President just agree to extend the current law for a year or two to gives themselves time to deal with the Fiscal Cliff. Prior to the election, I would have rated this one as the most likely result. Now this one seems the least likely of the possible outcomes. While I don’t believe that President Obama will cave in on the tax issues, it is possible that he would allow a temporary extension of the current estate tax law in exchange for the Republicans capitulating on the other items of his proposal. Chance of Outcome: 5%

Revert Back to 2009 Law:

This is the plan that President Obama first proposed while campaigning for election in 2008. Although he agreed to different estate tax provisions at the end of 2010, he has again presented this as his preferred plan. Under this alternative the Federal Estate Tax Exemption would be reduced to $3.5 million, the Gift Tax Exemption would be reduced to $1.0 million, and the maximum Federal Estate Tax Rate would be increased to 45%, just as it was in 2009.

After winning reelection, President Obama appears very confident that he can get the Republicans to accept the full range of his deficit reduction proposals. However, the Republican leadership has rejected his proposal and offered their alternative. Reminiscent of the failed 2010 deficit negotiations, under the President’s proposal the vast majority of the reduction would come from tax increases while the Republicans’ proposal has an equally large percentage coming from spending cuts.

With the President leaving for Hawaii and congress anxious to adjourn for the Christmas holidays, there is little time left to bridge such a large gap. Still this could all be political theatrics leading up to a behind closed doors grand resolution. Not being privy to the closed door meetings, it is hard for me to judge. But political insider Erskine Bowles, a former White House chief of staff and the former co-chairman of Obama’s debt commission, puts the chances of grand deal at 1 in 3. Chance of reverting to 2009 law: 35%

Revert Back to 2001 Law:

The do nothing solution. Although neither side is advocating going back to President Clinton’s estate tax law, if the President and congress are unable to agree that is where we will be. If we revert back the Federal Estate Tax Exemption will be $1 million as will the Gift Tax Exemption. To make matters worse the Maximum Estate Tax Rate will be 55%. Chances of going way back to 2001: 60%

First Posted on Surviving the Estate Tax Fiscal Cliff.