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Whither Estate Tax Legislation?

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Orlando, Fla.

“What will happen with the estate tax proposals currently before Congress?”

A member of the audience put that question to a speaker here at a breakout session of the annual Life Insurance Conference.

The topic was a hot button at the conference, which was co-sponsored by LIMRA International, Windsor, Conn.; LOMA, Atlanta; the Society of Actuaries, Schaumberg, Ill.; and the American Council of Life Insurers, Washington.

“I think Sen. [Max] Baucus’ proposal far overshadows the other proposals,” said panelist Mandana Parsazad, referring to S. 722, a bill Baucus, R-Mont., introduced just last week.

“But then, you never know,” added Parsazad, who is the senior counsel for taxes and retirement security at American Council of Life Insurers, Washington. She noted that some people favor other approaches, such as an extension of the 2009 rules for 1 year — essentially a 1-year patch — or a freeze that would make the 2009 rules permanent.

She pointed out that there are 13 new members of the Senate this year–2 Republicans and 11 Democrats–”but there is no indication yet where they fill be on this issue.”

As far as reading tea leaves for the estate tax goes, “it will be interesting to see their votes,” Parsazad said.

S. 722, the Taxpayer Certainty and Relief Act of 2009, is more comprehensive than the other proposals now in Congress, Parsazad said.

Among other things, the bill would extend permanently most of the middle-class tax cuts enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003. Individuals would be exempt from estate taxes up to $3.5 million. The top tax rate would be 45%

S. 722 will be helped by the fact that Baucus is chairman of the Senate Finance Committee, and that Baucus is working on the bill with the highest-ranking Republican member of the Finance Committee, Sen. Charles Grassley, R-Iowa, Parsazad said.

Baucus and Grassley “work together well,” Parsazad said.

While the outcome of the estate tax debate remains uncertain, “I don’t see us going back to pre-EGTRA days or full repeal,” Parsazad said.

Co-panelist Jonathan Forster, co-managing shareholder at Greenberg Traurig L.L.P., Tysons Corner, Va., warned that policymakers are looking for offsets to the cost of any permanent increase in the estate tax exemption. “The groundswell is, ‘You gotta pay for this,’” he said.

Parsazad agreed. “It looks like people don’t want to change this without finding a way to pay for it.”

Forster talked about strategies advisors can adopt to respond to the uncertainty.

One strategy he suggested is to “be ready for repeal.” The 1-year estate tax repeal in 2010 could take effect if Congress fails to pass reform legislation, he explained. He said planning documents should include provisions that become effective only upon repeal of the estate tax.

But Forster advised against trying to incorporate all contingencies. “You can’t really draft planning documents around multiple contingencies,” he said. “The clients will never understand it.”

Another strategy is to “plan for liquidity,” Forster said. The financial crisis is limiting the access of individuals and estates to liquidity, because they cannot borrow funds or sell assets to raise capital, he explained. In addition, clients could face increased estate tax liability, thus increasing the need for liquidity, if a reversion to pre-EGRRA estate tax law occurs, he cautioned.

Therefore, Forster said, “the need for a guaranteed liquid source of funds, like life insurance, will be greater than ever, and individuals should plan accordingly.”