Earlier this year, Dan Duncan died with an estimated net worth of $9 billion, ranking him as the 74th wealthiest person in the world.  Since Congress failed to address the estate tax this year, his heirs stand to receive that entire sum without the imposition of an estate tax.  Had he died last year, only $3.5 million of his assets would have passed free of estate tax, with the remaining amount taxed at a rate of 45%.  How’s that for a tax blunder by our government!

There is continued talk in Congress that a retroactive application of an estate tax in excess of a $3.5 million tax exemption could be enacted effective January 1, 2010.  Give the size of Mr. Duncan’s estate, there’s no doubt that his family would have the financial means and motive to challenge a retroactive application of an estate tax.   Such a challenge would seem to involve the constitutionality of a retroactive enactment of a tax.  Past retroactive tax law changes usually related to changes in the tax code to perhaps correct an ambiguity and the like, but to the creation of a new tax.

The New York Times reported that the Treasury Department collected more than $25 billion in estate taxes in 2008.  When factoring in Mr. Duncan’s estate (assuming he had died with a $3.5 million estate tax exemption in place), the government lost estate tax is over $4 billion.  This amount, of course, is quite meaningful and should capture Congress’ attention as it ponders tax law changes.  

We’ll have to continue to wait on Congress to find out if they will address the estate tax this year.  Not withstanding that possibly, all the assets received by Mr. Duncan’s heirs, under current law, will be subjected to a capital gains tax upon sale (other than a modest $1.3M basis increase if anything were sold).  In other words, Congress will either collect an income tax or estate tax on this estate, depending on it’s appetite for applying a retroactive law changed to the estate.