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Estate Planning News
Estate Tax Faces Its Own Life-and-Death Struggle
Jonathan Weisman on 09/22/2009 at 2:36pm (UTC) | | | SEPTEMBER 19, 2009
Estate Tax Faces Its Own Life-and-Death Struggle: Parties Are at Odds on How to Deal With a Levy Set to Disappear Entirely in 2010 Before Being Resurrected at Full Pre-Bush Level
By JONATHAN WEISMAN
WASHINGTON -- President Barack Obama and congressional Democrats are united behind an effort to block a scheduled year-end repeal of the estate tax. But prospects are blurred by divisions between the House and Senate over the contours of a restored tax, as well as Capitol Hill's focus on health care.
"Health care has become such a consuming passion, this has dropped to the second tier," a senior Democratic tax aide said about keeping the estate tax in place. "But it has to be done."
President George W. Bush's 10-year, $1.35 trillion across-the-board tax cut, passed in 2001, included a slow-but-steady reduction of the levy on heirs that critics branded "the death tax." Under the law, the value of an inheritance shielded from taxation increased from $1 million to $3.5 million in 2009. The tax rate on inheritances larger than that slowly decreased from 55% to 45%. Then, in 2010, the entire estate levy was to disappear.
But it is scheduled to come back in full, pre-Bush force in 2011 -- a 55% rate on the portion of estates over $1 million -- when the entire 2001 tax cut expires. That was a compromise accepted by tax-writers to limit the long-term cost to the government of the tax cuts for budget scorekeeping purposes. But many policy makers assumed at the time that Congress in 2010 would instead vote to lock the full tax cuts in place permanently.
Democrats say they do want to keep the Bush tax cuts in place for middle- and lower-income families. But they want to let the cuts expire for upper-income households and for large inheritances. Mr. Obama has proposed permanently locking in the estate tax at the current 45% rate with a $3.5 million exclusion. Politically, if Democrats can maintain the status quo rather than let the tax disappear next year, they can avoid being portrayed as raising taxes when the levy reverts to its pre-Bush level in 2011.
Officially, Republicans in Congress would like to see it disappear on schedule. "There ought to be a full repeal," said Rep. Dave Camp of Michigan, the ranking Republican on the tax-writing Ways and Means Committee. "Death should not be a taxable event."
But very few believe that is possible. Republican leaders worry that liberal Democrats would accept a one-year repeal, then block any action in 2010 to ensure the tax returns in 2011, at 55%. That has put Republicans in the mood to compromise as well.
"Those people who believe repeal of the estate tax will happen are probably more delirious than Ralph Nader thinking he could be president of the United States," said Mark Bloomfield, president of the American Council for Capital Formation, a Washington-based organization, who has lobbied for estate-tax repeal as part of a broader campaign for lower taxes on capital.
Further complicating matters is that the central players on estate-tax policy also have key roles in the health-care debate: Senate Finance Chairman Max Baucus (D, Mont.) and House Ways and Means Chairman Charles B. Rangel (D, N.Y.).
Mr. Rangel agrees with the president that the 2009 estate tax -- a $3.5 million inheritance-tax exclusion and 45% rate -- should be locked in permanently. In March, Mr. Baucus proposed the same policy, though he added a provision indexing the exclusion to inflation.
That plan is likely to pass the House handily. But the Senate is more complicated. Senate Republican Whip Jon Kyl of Arizona has proposed a $5 million exemption, with a 35% tax rate, and he has teamed with moderate Democrat Blanche Lincoln of Arkansas, who is up for re-election in a state where opposition to the estate tax is solid.
A senior Republican tax aide said the proposal would give the Treasury $81 billion less over 10 years than the president's. If offsetting tax increases or spending cuts could be found, the aide said the Lincoln-Kyl version would have strong momentum. During the debate over the 2010 budget plan, 11 Democrats backed the Lincoln-Kyl version of an estate-tax extension, as long as it is paid for.
But sharply different bills in the House and Senate could make a long-term solution elusive. With health care and routine spending bills jamming the Senate calendar, an estate-tax fight -- first on the Senate floor, then with the House -- could make passage of a bill virtually impossible this year, House and Senate aides say. Lawmakers likely would fall back on a one-year extension of the current rate and exemption and leave the fight to next year.
Even Ms. Lincoln has her eyes elsewhere. "Our complete focus is on health care," said Ben Portis, a spokesman for the senator. "On the estate tax, there will be a time and place."
Write to Jonathan Weisman at jonathan.weisman@wsj.com
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Estate Planning & the 2010 Federal Budget
Minor & Brown, P.C. on 09/06/2009 at 3:16am (UTC) | | |
The most recent information published by the Congressional Budget Office - Budget Options, Volume 2 (http://www.cbo.gov) contains several items that could impact estate planning:
Estate Tax Changes: Four modifications are proposed by the Congressional Budget Office, each of which would have a dramatic tax-reducing effect compared to current estate tax law:
Option 1: Reunify the gift and estate tax exemption amounts at $5 million; index the exemption amount for inflation; fix the estate tax rate (as a flat rate) at the top capital gains rate - currently 15%; and eliminate the state death tax deduction, without reinstating the state death tax credit.
Option 2: Reunify the gift and estate tax exemption amounts at $5 million; index the exemption amount for inflation; institute a progressive rate structure as follows : the first $25 million would be taxed at the top capital gains rates, and anything in excess of $25 million would be taxed at 30%.
Option 3: Reunify the gift and estate tax exemption amounts at $3.5 million; index the exemption amount for inflation; and retain a flat rate of 45% for all wealth transfer taxes. This basically freezes the estate tax at 2009 levels.
Option 4: Repeal the estate and GST taxes permanently in 2010, eliminating the 2011 reinstatement.
Charitable Income Tax Deductions: Lifetime charitable giving is an important part of many estate plans. Changes suggested by the Congressional Budget Office would: (1) allow people who do not itemize their deductions to qualify for limited charitable deductions, (2) limit the charitable deductions for gifts of appreciated property to the taxpayers adjusted basis in the property, and (3) only allow charitable deductions to the extent that they exceed a taxpayers adjusted gross income by 2%. The cumulative effect of these suggestions is to make charitable giving much less advantageous, from a tax perspective at least.
Other changes suggested by the Congressional Budget office include: increasing the marginal rate of each tax bracket by 1%, taxing employer paid life insurance premium payments, and reducing the mortgage interest deduction. Any of these changes would require congressional action, so it is probably too early to despair or get your hopes up. | | | |
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Whither the Estate Tax? August 19, 2009
Walter S. Bristow III, JD, CLU, ChFC on 08/29/2009 at 5:38pm (UTC) | | | 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.
Senate Bill 722
$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).
House Bill 2023
$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.
House Bill 436
$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?
Related articles:
Senate Estate Tax Bill Would Exempt $3.5 Million
Planning Implications of Proposed Estate Tax Changes
Roth IRAs Offer 3 Estate Planning Benefits
Obama Calls for More Estate and Gift Taxes to Pay for Healthcare
IRS Blended Interest Rate for Demand Loan
Split Dollar Plans Falls to Under 1%
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© Copywrite: 2009 All Rights Reserved. Frank A. Cseke, Esq.
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