When will we see estate tax reform? That burning question is on the minds of many these days, especially with less than four (4) months to go until 2010, the year that the estate tax is scheduled to be repealed.
Many expected reform in 2008.....it never happened; more expected reform in the first half of 2009......it never happened. The clock is ticking. Will we really see estate tax repeal? That prospect is still very unlikely in this author's view.
It seems increasingly likely that as a stopgap measure, the House of Representatives may vote for a one year extension of 2009 estate tax law ($3.5 million exemption with a 45% tax rate), which would effectively maintain the status quo. If the extension or "freeze" of current law occurs, no one knows what will happen after 2010. The spectrum of possibilities ranges from another freeze to sweeping reform, the likes of which we saw in 2001 when President Bush signed EGTRRA into law.
History shows that the political climate must be right for Congress to pursue changes that affect (or have a perceived effect on) budgetary items. The Senate seems to support a larger exemption and lower tax rates – a result which may not be possible under the current economic situation.
As we all know, under current law, barring changes in the law, there would be no estate tax for individuals dying in 2010. The estate tax springs back into existence in 2011 with a $1,000,000 per person exemption and a 55% top tax rate - levels that were in effect in 2001 and which seem out of sync present day.
Three major bills are currently being considered:
Senate Bill 722:
(a) Makes permanent the 2009 $3.5 million exclusion and (top) 45% tax rates,
(b) reunifies the estate and gift tax credit (currently, the gift tax exemption is only $1 million),
(c) allows for portability (allows transfer of a deceased spouse’s unused exemption to the surviving spouse), and
(d) indexes the exemptions for inflation.
House Bill 2032:
(a) makes permanent the exemption level at $2 million,
(b) indexes that level for inflation,
(c) establishes progressive tax rates of 45% for estates valued between $2 million and $5 million; 50% for estates valued at $5-to-$10 million; and 55% for estates valued over $10 million,
(d) reunifies the estate and gift tax,
(e) creates exemption portability,
(f) restores the state estate tax credit and
(g) provides indexing for inflation.
House Bill 436:
(a) freezes the exclusion and rate at 2009 levels,
(b) reunifies the estate and gift tax so that the cap on tax free lifetime gifts would go from its present $1,000,000 to $3.5 million (but use up that protected amount so whatever exemption was used during lifetime would not be available at death),
(c) limits the valuation discount for family limited partnerships, and
(d) provides strict valuation rules for transfer of non-business assets.
We are following all developments closely, so watch for future posts.
