Rumor has it that Congress will pass a temporary one-year extension of the estate tax before the end of the year. This would continue the estate tax at a 45% maximum rate and a $3.5 million exemption. Otherwise, the tax will be ‘repealed’ in 2010 and then, in 2011, revert to a maximum 55% rate and $1 million exemption.
When Congress reduced rates and increased exemptions, the ‘repeal’ and reversion to 2001 rates was the slight-of-hand that allowed the budget numbers to work. No one really expected either to really happen. But then no one expected the ‘Kill the Death Tax’ movement and the current financial crisis to happen either.
Congress is currently looking at three primary estate tax bills.
- $3.5 million indexed exemption and top 45% tax rate.
- Reunifies the estate and gift tax credit.
- Allows the transfer of a deceased spouse’s unused exemption to the surviving spouse (exemption portability).
- $2 million indexed exemption.
- Sets progressive tax rates (45% for estates valued between $2 and $5 million, 50% between $5 and $10 million, and 55% over $10 million.
- Reunifies the estate and gift tax.
- Creates exemption portability.
- Restores the state estate tax credit.
- $3.5 million exemption and top 45% tax rate.
- Reunifies the estate and gift tax.
- Limits the valuation discount for family limited partnerships.
- Creates strict valuation rules for any transfer of non-business assets.
There are a number of other bills – but they don’t seem to be getting the attention that these three are.
A Congressional Budget Office (CBO) report offered some options for paying for the federal spending on health care programs or the nation’s health insurance system. Such reports rarely offer new options – their main purpose is to analyze the financial impact of options already raised.
Among the plans analyzed were four related to estate taxation.
CBO Alternative 1
- Sets a $5 million exemption starting in 2010.
- Indexes that amount for inflation.
- Sets the estate tax rate equal to the top rate on capital gains (now 15 percent in 2010 and 20 percent thereafter).
- Allows a stepped-up basis for property transferred from a decedent.
- Denies a deduction or credit for state death taxes.
CBO Alternative 2
- Makes the same changes as Alternative 1, except it would create an indexed two-tiered rate (top capital gains rates on the first $25 million and 30% above that).
CBO Alternative 3
- Keeps the current $3.5 million exemption.
- Indexes that for inflation.
- Sets the top tax rate at 45 percent.
- Keeps a step-up in basis.
- Allows a deduction for state death taxes.
CBO Alternative 4
- Repeal the estate tax in 2010.
- Retains a $1,000,000 gift tax exemption.
- Imposes a carryover basis.
Final Thoughts
With the deficit growing at a hitherto unbelievable rate and (if Congress ever enacts it) untold billions (trillions?) needed for health care reform, the estate tax is looking ever more enticing as another pocketbook to pay the bills. How could Congress ever pass up the opportunity to keep taxing the dead?
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The concept of “exemption portability” is terrific. Implementing it would free up untold millions or billions of dollars now spent on accountants and attorneys for federal estate tax planning. I am a CPA and an attorney. I do a fair amount of estate planning in my general practice. Exemption portability would effectively shut-down 99% of my federal estate tax planning business. I won’t complain. I say, “Hurray for reduced regulatory burden!”
Dan, depending on how it’s done, I think exemption portability could lead to a big increase in business. The key question will be HOW will each spouse record and transfer the exemption? It seems like it will be on a 706. In the past, if you had a first deceased spouse who was a little bit under the exemption, you didn’t file the 706. Portability could open the door to many more people being advised to file a 706 to lock in the exemption amount.