The Senate hopes to decide Thursday whether to debate a bill that would repeal the estate tax.

Major insurance industry trade groups have been supporting more modest reform, which would exempt around $2.5 million in assets from the estate tax.

The Republican Senate leadership reluctantly decided to embrace reform in principle late Wednesday, but at a higher level than the insurance industry is comfortable with–exempting about $10 million in assets.

David Stertzer, chief executive of the Association for Advanced Life Underwriting, Falls Church, Va., said today that the AALU expects a vote on a motion to proceed, which would start consideration of the estate tax repeal bill, H.R. 8.

The Senate set the vote for 10:30 a.m. Thursday.

“Right now, it looks close, and the situation is very fluid, but there may not be the 60 votes needed to consider repeal,” Stertzer said.

If H.R. 8 supporters are not able to round up enough support for repeal, Senate Republican leaders may be willing to consider a vote on an estate tax reform proposal.

Eric Ueland, chief of staff to Senate Majority Leader William Frist, R-Tenn., has said that creating a “sensible” exclusion and a rate that is “significantly less” than 55% would be “a big step forward in putting some fairness back into the tax code,” according to an article posted on the Wall Street Journal Online.

Sen. Jon Kyl, R-Ariz., has been working with Sen. Max Baucus, D-Mont., the most senior Democrat on the Senate Finance Committee, to try to negotiate a reform compromise, Stertzer said.

“We understand that a proposal put forward by Senator Kyl — featuring a $5 million individual exemption and a top rate of 15% for estates under $30 million — would be tantamount to repeal from a fiscal standpoint,” Stertzer reported. “Given the long-term fiscal implications of repeal and other costly national priorities, AALU does not believe repeal or expensive reform alternatives would be sustainable over the long term. AALU continues to advocate for fiscally responsible estate tax reform that exempts the vast majority of Americans from estate tax liability while allowing the remaining few subject to the tax to plan with certainty.”

A proposal backed by both the AALU and the National Association of Insurance and Financial Advisors, Falls Church, Va., states that reform with “a $2.5 million exemption and a top rate of 45% would exempt 99.7% from paying any estate tax and would cost less than half as much as repeal.

“We believe this would be sustainable over the long term,” Stertzer said.

Baucus and Sen. Charles Grassley, R-Iowa, chairman of the Senate Finance Committee, are among several moderate senators proposing a compromise calling for a $3.5 million to $5 million threshold per spouse, with rates graduating from 25% to 45% of the remainder of the estate.

Under present law, the threshold gradually rises from the current $1.5 million to full repeal in 2010. But, unless the law is renewed, the tax would revert to 2001 levels, a $1 million threshold per spouse and a 55% tax rate above that level.

Reflecting industry concern, members of NAIFA began sending letters to their members of Congress June 2 saying that they favor “reform of the estate tax over repeal.”

In the form letter, obtained from a NAIFA member, NAIFA says it supports a threshold level of $2.5 million to $3.5 million per spouse and a top tax rate of 35% to 45%, along with a step-up in tax basis for transferred assets.

“NAIFA supports improving the tax incentives applicable to a wide range of our products–life insurance, [long term care insurance], annuities, disability insurance, retirement, health insurance, etc.,” according to the authors of the letter. “Like it or not, we are in competition with all sorts of other proposed uses of tax revenue, for example, lowering the tax rate on stock dividends, or Lifetime Savings Accounts.”

Repealing the estate tax effective in 2006 would result in a net loss of tax revenue of $389 billion from 2006 through 2016, and of $796 billion from 2012 through 2021, the authors of the letter write.

“That’s tax revenue that NAIFA believes could be directed toward improving tax incentives for life insurance, annuities, LTCI, DI, health insurance, etc.” the authors of the letter write. “Our chances of getting improved incentives will decrease if revenue is directed elsewhere.”