With the Federal Estate Tax rules on the cusp of expiration (for one year) in a matter of weeks, wealth managers and their clients are having a difficult time predicting what the government will do (or not do) to deal with the pending sunset provisions of the current law. In the following article, we analyze the most current and leading proposed modifications and discuss what planners need to know now, in order to assist their clients and prepare in light of these proposed changes.
A laundry list of bills
Congress has numerous issues to deal with in estate tax reform that go far beyond exemption limits. Some of these issues include:
- Estate tax rates and how they should be applied.
- Reunification of gift and estate tax.
- "Portability" of estate tax exemption unused by a deceased spouse or spouses.
- GRAT term limits.
- Valuation and discounting issues.
- Regulation of Crummey withdrawal powers.
- State death tax credit and deduction issues.
In fact, well over thirty bills have been introduced this year to attempt to deal with these issues, which are keeping legislators busy. While some of these carry minor implications, there are currently (as of November 2) four major bills likely to impact practioners and their clients which we review below:
House Bill 436. This bill was introduced in January of 2009. It permanently establishes the 2009 exemptions and tax rates ($3.5 million estate-tax exemption and top tax rate of 45%), retains basis step-up, reunifies the estate- and gift-tax exemption but adds limits to the valuation discount for family limited partnerships (FLPs). Finally, this bill provides strict valuation rules for the transfer of non-business assets.
Senate Bill 722. Introduced in late March 2009, this bill makes 2009 estate tax law permanent ($3.5 million estate-tax exemption and top tax rate of 45%), reunifies the gift- and estate-tax exemptions, indexes the exemption amount for inflation and allows for exemption portability (allows the transfer of a first-to-die spouse's unused estate-tax exemption to his or her surviving spouse). Finally, Senate Bill 722 includes a special use valuation that benefits family farms and other real-estate heavy family businesses.
House Bill 2023. This bill has far more reach than the others because it drops the estate-tax-exemption level to $2 million and creates a tiered, top tax-rate metric starting at 45% for estates valued from $2-$5 million, 50% for estates valued at $5 to $10 million, and 55% for estates valued over $10 million, all indexed for inflation. Like Senate Bill 722, this bill reunifies the estate- and gift-tax exemption, allows for exemption portability and restores the state estate-tax credit.
House Bill 3905. This bill, also called the "Estate Tax Relief Act of 2009," was introduced on October 22, 2009. HR 3905 calls for an increase in the estate-tax exclusion amount of $150,000 a year each year from 2010 through 2019. At the same time the bill calls for a reduction in the effective top tax rate by 1% a year. In 2019 this results in an exemption amount of $5 million (indexed for inflation thereafter) and a top tax rate of 35%. In addition, the deduction for state estate taxes would go down 10% per year through 2019, when it would cease to exist. HR 3905 also abandons carryover basis.
