While still subject to change, congressional action last month signaling reform, not repeal, of the estate tax “is strong enough to give some indication as to how to advise our clients,” says a Washington lawyer.
In fact, says Alban Salaman, chairman of the Mid-Atlantic Region Private Wealth Services Group at Holland & Knight LLP, “client resistance to some estate tax planning techniques in hopes of full repeal is declining” as a result of May 17 congressional action on the budget resolution.
In its action, Congress adopted a non-binding resolution providing guidelines to appropriations chairmen for spending and taxation actions over the next 5 years.
The guidelines propose freezing the estate tax at the levels now called for under existing law to be in effect in 2009. This would provide for a $3.5 million per-person exemption and a top tax rate of 45%, both of which are acceptable to the insurance industry.
And, based on the budget surplus that the resolution projects would exist in 2012, the $3.5 million/45% top tax rate would be made permanent in 2012.
Under current law, passed in 2001, the estate tax would be eliminated in 2010, but would return with a $1 million per-person exemption and a top tax rate of 55% in 2011.
The Senate defeated efforts last year to establish a $5 million per-person exemption, indexed for inflation, and a 35% top tax rate, effective in 2011.
Efforts to impose similar guidelines in the budget resolution ultimately passed by Congress this year also failed.
The final budget document passed on May 17 includes a specific provision that “supports” reform of the estate tax to protect small businesses and family farms.
In a statement that day, Sen. Max Baucus, D-Mont., chairman of the Senate Finance Committee, said the budget resolution sees permanent estate tax reform, not repeal, as of 2012, but it is contingent on there being a budget surplus.
On May 18, Ernst & Young said in comments to clients regarding the budget resolution, “The practical effects of the conference report’s approval are limited given that the measure is a resolution; does not specify how committees must achieve savings; and does not require the president’s signature.”
But Salaman says he is advising clients based on the budget resolution.
“We should definitely go forward,” he says. “I never believed the estate tax would be repealed.”
“Once a Democratic Congress was elected,” he explains, “a consensus emerged that the estate tax would be retained in some form or other.”
“Before the Democrats took over, we had experienced some pushback from clients, an attitude of ‘let’s wait and see what happens,’” he adds. “But now there is little pushback, and existing client resistance to some estate tax planning techniques is declining. We’ve always sort of assumed it would be there.”
His clients include family limited partnerships that use second-to-die life insurance and other estate planning techniques, Salaman says.
A lawyer and lobbyist for an insurance company who asked not to be identified due to the sensitivity of the issue to the industry, says, “What is clear [from the budget resolution] is that the current law provision providing for full repeal of the estate tax will not go into effect.”
“So the budget resolution is couched in terms of some form of estate tax reform, and not repeal,” the lawyer and lobbyist says.
The lawyer and lobbyist also notes that the $3.5 million per-person exemption and 45% top tax rate is acceptable to the industry.
“While this would be a very favorable outcome from our perspective, it is important to note that it is not specifically in the budget resolution,” the industry official says.
Salaman, who must advise clients, was more direct. “While these are not binding resolutions, and ‘it ain’t over till it’s over,’ the budget resolution is a current indication of what both Houses of Congress are thinking right now.”
“It is not the law yet, and members of Congress can change their minds,” he explains, but although “it is only a budget resolution and they may have a different view when it comes to the final vote, this indicates the current thinking in Congress.”