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Estate Tax Reform Bills Proliferate But Congressional Action Stalls

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With the clock ticking toward expiration of current law in 2010, at least 15 bills have been filed in Congress this year to either repeal or modify the estate tax.

However, despite this pressure, officials of life insurance agent groups say the current unsettled picture is likely to remain the status quo until next year.

The deadline deals with expiration of the estate tax provisions of the 2001 Economic Growth and Tax Relief Reconciliation Act of 2001, or EGTRRA, which are due to sunset at the end of 2010, with full repeal of the estate tax scheduled to last only for the year 2010.

If Congress does not change the law before it expires, then on January 1, 2011, estate and gift tax law will return to what it was had EGTRRA never been enacted.

The unified estate and gift tax will be reinstated with a combined exclusion of $1 million. The maximum tax rate will revert from 45% in 2007-2009 to 55%.

According to a recent report from the Congressional Reporting Service, the large year-to-year differences in the estate tax law mean that wealthy individuals face a wide and erratic variation in their potential estate tax liability over the next 4 years, 2008-2011, depending upon the year they happen to die.

“While there is urgency to resolve this issue before the year of repeal in 2010, the Senate Finance Committee already has a full agenda and it would not be surprising to see movement postponed until 2009,” says David Stertzer, CEO of the Association for Advanced Life Underwriting.

In any case, “we should see several ‘bed-check’ votes throughout the course of the year,” Stertzer adds.

He says he believes “2009 will be a decisive year, and given the high cost associated with any reform proposal, it is unlikely that Congress will support any reform higher than a freeze of the 2009 level.”

Michael Kerley, senior vice president and chief federal lobbyist of the National Association of Insurance and Financial Advisors, adds that there is a “reasonable possibility that Congress will reform the estate tax before 2010–the one year complete repeal is scheduled to occur.”

He says NAIFA and its agents favor reform rather than repeal. As pointed out by the CRS report, if not modified, the 2001 version of the estate tax will be reinstated in 2011, Kerley says. “Before that deadline, NAIFA supports adopting a reform proposal that is fiscally and politically sustainable out into the future.”

Complete repeal “is not politically sustainable long term because it is simply too divisive politically,” he says.

AALU officials acknowledge that the large number of bills on the subject illustrate keen congressional interest in resolving the issue before the tax cuts expire in 2010.

And, with the recent passage of the economic stimulus, greater attention will be given to the cost of any reform or repeal proposal, AALU officials note.

Moreover, with pay-as-you-go rules having already been waived as Congress dealt with the one-year fix on the alternative minimum tax and the economic stimulus bills, “there is very little support for PAYGO to be waived again, especially for estate tax reform,” AALU officials say.

They note that permanent repeal of the estate tax accounts for one-quarter of the estimated revenue loss if President Bush’s 2001 and 2003 tax cuts are made permanent.

“Given these dynamics, a Democratic majority in Congress and the attention focused on the strongly contested 2008 election, it is very unlikely estate tax legislation will be passed this year,” they say.

According to Stertzer, the Senate Finance Committee is planning to hold two hearings on this issue; one on the broader discussion of an estate tax versus an inheritance tax and another focusing on estate tax reform options, including possible exemptions for small businesses and farms.

As for the Presidential candidates, Senators Barack Obama, D-Ill., and Hillary Clinton, D-N.Y., support reform, and while Senator John McCain, R-Ariz., has recently argued for an extension of the 2001 and 2003 tax cuts, it is possible that he could compromise on reform with a Democratic Congress, Stertzer says.

One priority for the AALU is to emphasize the need for a reasonable compromise–one that must include the reunification of the lifetime gift and estate tax,” says Larry Raymond, AALU president.

“Reunification enables clients to do more planning during their lifetimes and is an essential part of any sustainable, permanent estate tax reform,” Raymond says.

Asked what Congress should do, NAIFA’s Kerley says his group “believes that a middle ground reform is the only viable alternative.

“Establishing an exempt amount of $3 million to $3.5 million per taxpayer for the year 2010 and beyond would exempt about 99.6% of all potential estates tax payers from any tax,” Kerley says. “NAIFA favors a top rate of, say, 40-45% to complement the exempt amount set by Congress.”