Using Political Futures Markets to Forecast Your Estate Tax Exemption

You can tell your readers care about you when for four weeks you don’t post, and they begin to inquire after your health. Thank you, and your publisher is pleased to report that he is alive and very well! This has been a very busy month. No one seems to have gotten the memo that 2010 is the Year With No Estate Tax, because the phone keeps ringing. A lot. Clients keep acting like there is an estate tax. What’s more, the IRS is definitely still playing for keeps in their audits of transfer tax returns. Would the constant hum of activity suggest that (gasp) the estate tax is not going away for good?

One can’t dismiss that possibility.

Regular readers know we’ve covered “Forecasting the Fate of the Estate Tax” in some depth for a long time (for those posts, see here). Although KYEstates hasn’t hesitated to make qualitative predictions (see here for our March 12, 2010 post that continues to hold up rather well, if we do say so, all these months later), this late into the Year of Repeal, it’s time to get down to brass tacks and put some firmer numbers on the situation, don’t you think?

One obstacle immediately stands out: the estate tax is a political tax, not a revenue-raiser. (See here for an excellent brief by the Congressional Budget Office, explaining that during the last decade, the estate tax provided less than 1.5% of Federal government receipts.)  So, although it would be logical to expect that in an age of tragic(omical)ly sized deficits, the tax wouldn’t be reduced in scale and scope, politics isn’t logical. And because politics isn’t logical, it’s hard to forecast.

But that doesn’t mean markets don’t try. KYEstates thinks one of the most interesting political developments of recent years has been at the interface between politics and the capital markets, namely, political futures markets.  There are two leading political futures markets, Intrade.com and the Iowa Electronic Markets. These markets have some really fun applications, including figuring out what your estate tax exemption might be.

KYEstates has been busy at our “Skunk Works” and we are very excited to bring you our proprietary, exclusive, only-now-revealed-to-the-world POLITICAL RISK-ADJUSTED ESTATE TAX EXEMPTION FORECASTS!  We’ve prepared them for 2011-2012 and for 2013.

At KYEstates, we’re lawyers, so we definitely don’t believe all secrets should be open, but when it comes to estate tax forecasts, we do agree with Mr. Assanage that “information wants to be free”.  So, we encourage readers to dig into the actual Excel grids here. Play with them, apply your own intuition, and email us (carter {at} kyestates.com), please, with questions and comments. (Consider using your results to enter our Estate Tax Forecasting Contest.)

For readers who just want results, and only results, we’re happy to post the grids below.  In case PDF files are easier for any readers to print, they’re available here (2011-2012) and here (2013).

Readers, there is a lot of fun to be had in imminent posts in discussing the analysis in the grids, but for now, undertake your own review, and let us know what you think. Based on September 30, 2010 political futures markets, the KYEstates Political Risk-Adjusted Estate Tax Exemption Forecast is $1.71 million for 2011-2012 and $3.1 million for 2013.

Have fun with this! Happy Midterms, Happy Forecasting, and Happy Tax Planning Wishes to all of you….

It’s good to be back.

(** Just in case anyone out there doesn’t understand the intrinsic limits of political forecasting and prediction, and would mistakenly assume anything in this post is investment advice, please consult the detailed KYEstates disclaimer available here. **)