Estate Tax Reform Delay Likely

In the House, H.R. 2032, sponsored by Rep. McDermott, D-Wash., would make permanent the exemption level at $2 million, index that level for inflation, and establish progressive tax rates of 45% for estates valued between $2 and $5 million; 50% for estates valued at $5 to $10 million; and 55% for estates valued over $10 million.

This bill also includes reunification, portability, the state estate tax credit, and indexing for inflation.

Another House bill is H.R. 436, introduced by Rep. Earl Pomeroy, D-N.D. It would freeze the exclusion and rate at 2009 levels and reunify the estate and gift tax credit. The bill would, however, limit the valuation discount for family limited partnerships and set forth valuation rules for transfer of non-business assets.

Besides the basic tax rate and exemption levels, reunification and portability provisions are critical to the insurance industry, clients and small businesses, industry officials say.

Reunification of gift and estate tax exemptions would simplify estate planning by removing an artificial barrier that inhibits earlier intergenerational transfers of business interests and other assets, and would increase economic growth, according to industry officials.

Currently, the gift tax exemption is capped at $1 million, while the estate tax exemption is $3.5 million. Reunification would elevate the amount an individual could provide as a tax-free gift during a lifetime to $3.5 million.

Reunifying the lifetime credit would not give an individual $7 million for gift and estate transfers. Rather, the code would provide that an individual who used up the $3.5 million exemption through gifts would no longer have an estate-tax exemption, according to Spear.

Portability is the transfer of a deceased spouse's unused exemption to the surviving spouse. Under current law, each citizen has a $3.5 million exemption. The law in essence penalizes a married couple who does not set up a credit-shelter trust ,because the combined amount of $7 million is not used without adequate legal planning.

Portability would allow the unused portion to roll over automatically to the surviving spouse, as long as the executor makes a selection on the estate, according to Spear.

"This would simplify estate planning and estate administration for married couples, carry out our clients' nontax goals and increase consistency with existing tax policy without creating any new tax benefit," she said.