Estate tax revision update

There has been much discussion about the federal estate tax. The problem is that there has not been any resolution of the issue and 2010 is just around the corner. What follows is a brief summary of some of the current proposals.

Presently it appears that there are four major bills in Congress that address Estate Tax Reform. They are:

Senate Bill 722*:
• Makes permanent the 2009 $3.5 million exemption and top 45% tax rate
• Reunifies the estate and gift tax exemption at the estate tax level (the gift tax exemption is $1 million in 2009)
• Indexes the exemption for inflation
• Allows for exemption portability (i.e., allows the transfer of a decedent's unused exemption to his or her surviving spouse)
* Last major action in Senate: Referral to Senate Finance Committee on 03/26/2009

House Bill 2023**:
• Makes permanent the exemption level at $2 million
• Establishes top 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
• Reunifies the estate and gift tax exemption again at the estate tax level
• Indexes the exemption for inflation
• Allows for exemption portability
• Restores the state death tax credit
** Last major action in House: Referral to House Committee on Ways and Means on 04/22/2009

House Bill 436***:
• Makes permanent the 2009 $3.5 million exemption and top 45% tax rate
• Reunifies the estate and gift tax exemption again at the estate tax level
• Limits the valuation discount for family limited partnerships (FLPs)
• Provides strict valuation rules for the transfer of non-business assets
*** Last major action in House: Referral to House Committee on Ways and Means on 01/09/2009

House Bill 3841****:
• Makes permanent the exemption level at $5 million
• Establishes top tax rate of 45% for estates
• Reunifies the estate and gift tax exemption again at the estate tax level
• Repeals carryover basis for decedents dying in 2009
**** Last major action in House: Referral to House Committee on Ways and Means on 10/15/2009

The Congressional Budget Office (CBO), as Option 48 in their August 2009 publication entitled “Budget Options, Volume 2”, has modeled four alternatives for Congress:

Alternative 1:

• Makes permanent the exemption level at $5 million
• Establishes the tax rate to equal the top rate on capital gains (currently 15% in 2010 and 20% thereafter)
• Indexes the exemption for inflation
• Disallows the deduction for state death taxes

Alternative 2:
• Makes the same changes as Option 1, but a two-tiered rate would be used -- the first $25 million of taxable assets would be subject to the top capital gains rate, then taxable transfers above $25 million would be taxed at 30% (and the $25 million threshold would be indexed for inflation)

  Alternative 3:
• Makes permanent the 2009 $3.5 million exemption and top 45% tax rate

Alternative 4:
• Repeals the estate tax in 2010
• Retains the $1 million gift tax exemption
• Institutes a carryover basis regime

The following chart shows the effect of the four CBO options on the overall federal budget over the next decade

Considering our present enormous budget deficits ]]> */ Considering our present enormous budget deficits, if any of these alternatives is actually adopted, it seems that alternative 3 would be the most likely winner.