Madison, my youngest daughter – asked me if she could go over to a friend’s house. I told her that she could  - only to be vetoed by Patti. “She didn’t clean up her room like I asked her to,” Patti said. “And I don’t think that she should be able to go over to her friend’s house when she didn’t listen and do what she was supposed to.”

 This, of course, was met with cries of derision and anguish that one might expect from a much more traumatic event. “But Dad SAID I could go!” Madi protested through tears. “DAD! …..you said IT WAS OKAY!” Madi even threatened the “I’ll hold my breath” routine.

 “Go ahead. Hold your breath,” I said. “When I said it was okay I didn’t know that mom told you to clean up your room and that you didn’t do it,” I explained. “So I change my decision. No going to your friend’s house.”

 Anyone who has children has been through a similar conversation. We all make decisions and then have to renege on them. Usually though, to change one’s mind one needs some sort of justification. The justification might be caused by another’s actions or failure to act (as in the case with Madi) or for changes in circumstances.

 This apparently isn’t the case when we are historically dealing with the United States Congress, the President and the tax law. Allow me to explain.

 Under the tax law signed into law by President Bush back in 2001, the estate tax was scheduled to expire in 2010, only to be revived in 2011 with a much smaller estate tax exemption ($1 million). Congress was going to act to “bridge” 2010 by passing a law that would retain the 2009 tax exemption ($3.5 million per person) into 2010 as a “stop gap” measure. The intent was for Congress to reexamine the estate and gift tax system and come up with something more permanent.

 Well, along came the great ObamaCare debate. Estate tax reform got shoved to the back burner. So what do we have now? We have a system where there is no federal estate tax for this year. Or do we?

 Like the parent that changes his mind (whether or not for good reason) the Congress could, conceivably, retroactively pass legislation that imposes an estate tax for those decedent’s dying after January 1, 2010.

 Some have made the argument that in so doing, Congress would be acting unconstitutionally. This is known as a “due process” argument. In other words, no one had proper notice or even the ability to alter one’s conduct before the law changes. Therefore any such change shouldn’t be applied retroactively.

 You might suggest that when taxing the value of an estate, that value exists whether the estate is taxable or not, and therefore due process shouldn’t be considered. Aside from the concept of due process being a cornerstone of our constitution, I would counter that there is a lot even a large estate could do to minimize taxes. But if there is currently no tax imposed, then reasonable people could therefore assume that they wouldn’t be affected and would do nothing. On the other hand, if they knew that a retroactive law might be passed, they might act. That’s where due process comes in relation to estate tax planning.

 Unfortunately, those knowledgeable in the law suggest that the unconstitutionality challenge to a retroactive tax law change would not hold water. They point to another United States Supreme Court case decided in 1994 on a similar issue, United States v. Carlton.

 In a nutshell, that case involved the disallowance of an estate tax deduction that was legal in 1986 when the events causing the deduction occurred, but by the time the estate tax return was filed in 1987 the deduction was no longer legal. Congress and the President passed had passed a law that denied the deduction in the interim.

 The taxpayers argued that they should get the deduction, because the law indicated that the deduction was legal and proper. Only later was another law enacted that resulted in no deduction. The United States Supreme Court in essence said that the Congress and the President could take away tax deductions retroactively – and that we all had to abide by it whether or not we could foresee in our crystal ball what future tax law would look like.

 In other words, our President and Congress can tell us that we can’t go to our friend’s house, even if they earlier said we could. Worse yet, we cleaned our rooms. In Carlton the taxpayers did nothing wrong – other than reporting a deduction that was legal when the events leading to it occurred. There doesn’t appear to be any reason justifying the retroactive imposition of tax other than “the United States government needs the money,” which, incidentally was a reason cited in the text of the opinion justifying why Congress and the President could do such a thing.

 So for those of you who believe that there will be no federal estate tax imposed on decedent’s estates who die this year, don’t hold your breath.

 ©2010 Craig R. Hersch