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Estate Tax Certainty May Have To Wait

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Despite strong support in the Senate for legislation that would make permanent the 2009 estate tax level, and reunify the estate and gift taxes, the Association for Advanced Life Underwriting lobbyists are now cautioning that a permanent resolution to the issue may not come until next year.

If a permanent estate tax reform deal cannot be reached between the House and the Senate, AALU lobbyists say, they expect that Congress will extend the 2009 level of $3.5 million per person exemption and a 45% top tax rate into 2010–and then deal with the certainty issue in an omnibus tax package next year.

Congress must take some action on the issue this year because under current law, there will be no estate tax in 2010, but in 2011 the per-person estate tax exemption will drop to $1 million and the top rate will revert to the 2001 top rate of 55%.

David Stertzer, AALU CEO, and Jeff Ricchetti, of Ricchetti, Inc., the Democratic outside lobbying firm for the AALU, have been leading the industry’s lobbying efforts on behalf of permanent estate tax reform since the issue was first raised in 2001. That was when a Republican-dominated Congress pushed through legislation that would have eliminated the estate tax by 2010.

But Stertzer is voicing caution about a permanent deal this year, because at the moment there are clear differences between the Senate and House approaches.

Stertzer says AALU strongly supports legislation introduced March 26 by Sen. Baucus, D-Mont., chairman of the Senate Finance Committee, because it “strikes the right balance” on permanent estate tax legislation.

“There are many members, including some Democrats on the Finance Committee and virtually all of the Republicans in the Senate who would like to do more than simply extend 2009 current law,” he says.

At the same time, he continues, “we are operating in a significant deficit environment and many leaders in the House do not want to go beyond 2009 current law.”

Stertzer notes that Baucus’s bill, “in our view, strikes the right compromise between those two camps.”

The Baucus bill, S. 722, reunifies the estate and gift taxes, establishes the $3.5 million per person exemption, indexes it for inflation, sets the 45% top tax rate and takes the individual spousal exemption and makes it automatically portable to the other spouse.

Otherwise, “under current law, if you don’t establish a trust, the second-to-die doesn’t automatically get your exemption,” Stertzer says. The legal term for the issue is “portability,” he explains.

As for reunification of the gift and estate taxes, Stertzer and Ricchetti explain that “if you didn’t do it, you would have a perverse incentive to retain those assets until death.” The bill says, ‘We’re going to treat them both the same way,’” they say.

Richetti says the Baucus bill “splits the difference between the desire to do more and the budget constraints, and, in our view, he came up with the right answer.”

In this case, according to Stertzer and Richetti, simply extending 2009 current law would cost more than the $256 billion to finance over 10 years, because, except for 2010, when the estate tax would have been phased out under current law, a lower exemption carries with it a budget price.

“AALU’s number one priority on this issue, this year, is to make sure important tax policy simplification techniques such reunifying the exemptions for the lifetime gift and estate tax are included in the final deal,” Stertzer said. “It is critical that our members’ clients have a simplified approach to estate planning.”

Officials of the National Association of Insurance and Financial Advisers laud the Baucus bill, but acknowledge there is deep division in Congress over the issue.

“There are a lot of people who want to repeal the estate tax completely, and there are a lot of people who don’t,” says Cliff F. Wilson, president of NAIFA.

The Baucus compromise has a decent chance of actually passing Congress,” Wilson says. “This is good news for those individuals and couples who need to plan and were not looking forward to a return to 2001 estate tax rules in 2011 when an exempt amount of $1,000,000 would be reinstated.”

As a possible compromise, NAIFA has previously supported Baucus’ proposed exempt amount level of $3.5 million, a top rate of 45% and a reunification of the estate and gift tax laws.

Under a “unified” system, if a taxpayer makes gifts totaling a million dollars over his lifetime and then dies, the cumulative amount of the gifts will be deducted from whatever the exempt amount is when he dies.

Wilson explains that if it is $3.5 million, then $1 million (in gifts) will be deducted from the $3.5 million, lowering his exempt amount to $2.5 million for estate tax purposes. Anything above $2.5 million would then be subject to estate tax.

“If the two tax regimes are not “unified” the exempt amount would remain at $3.5 million in this example,” he says.

According to Wilson, the problem developed because when Congress enacted legislation in 2001 repealing the estate tax for the year 2010, it did not repeal the gift tax, “strangely enough, for 2010.

“So now the two must be reunited by legislation–presumably this year–to take effect in 2010,” he says.