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Financial Planning > Tax Planning > Tax Reform

Fuzzy Picture On Estate Tax Reform

By Arthur D. Postal

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Permanent estate tax legislation could be delayed until 2010 by Congress, lobbyists are cautioning, although final action may not take place until December.

That is the view of officials at the Association for Advanced Life Underwriting despite a recent flurry of action on the issue, including increasingly strong Congressional support for legislation that would make permanent the 2009 estate tax level, and reunify the estate and gift taxes, the lobbyists say.

They say the most likely scenario is 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.

At the same time, bipartisan legislation was introduced in the Senate as Congress departed for a recess April 2 that would extend the carryback period for net operating losses of life insurance companies for 2008 and 2009.

The bill, S. 823, was introduced by Sen. Olympia Snowe, a ranking member of the Senate Finance Committee.

According to officials at the American Council of Life Insurers, the bill is a stand-alone version of a provision that was initially in the economic stimulus package.

It would temporarily extend the carryback period for net operating losses for tax years 2008 and 2009 for all industries. “Life insurance companies are included,” the ACLI says.

“It makes sense that Congress would extend the carryback period in this time of economic turmoil,” says Whit Cornman, a staff official at the ACLI.

As to other tax issues, AALU lobbyists cite Congress’ focus on health care reform. “Another dynamic consistent with this is the fact that the study of tax reform options requested by President Obama is due in December,” according to David Stertzer, AALU CEO. “That would suggest that the big tax issues are likely to emerge in 2010, rather than 2009.”

This is despite the fact that the Senate approved a 2010 budget blueprint amendment before recessing that would increase the permanent estate tax exemption to $5 million and cut the top tax rate to 35%.

But Stertzer calls the provision “largely symbolic,” saying it was offset by another amendment added later, before the entire blueprint–or “concurrent resolution”–was passed by the Senate on a party-line vote.

The other amendment creates a point of order that would disallow any additional estate tax relief–beyond that which was contained in President Obama’s budget–less an equal monetary amount of tax relief is first provided to individuals earning less than $100,000. That amendment was introduced by Sen. Richard Durbin, D-Ill., and passed by a vote of 56-43.

In a bulletin to AALU members, Stertzer says it is important to note that “the votes are nonbinding and it is very possible, if not likely, that they will be stripped from the final budget resolution.”

Lawmakers expect both houses of Congress to approve a concurrent resolution by the end of April.

Of greater importance, according to AALU, are two bills introduced before the recess, S. 722, by Sen. Max Baucus, D-Mont., chairman of the Senate Finance Committee, and H.R. 436, introduced in the House by Rep. Earl Pomeroy, D-N.D.

Both would make permanent a $3.5 million per-person exemption, and establish a 45% maximum tax on estates above that level. The Baucus bill would also include key reforms–particularly reunification of estate and gift tax exemptions–as well as indexing for inflation and portability. The Pomeroy bill does not include these reforms and imposes a 10% surtax on estates valued over $10 million.

“There is an appetite in the Senate” to go beyond the Obama budget, which calls for a $3.5 million per-person exemption and a maximum tax rate of 45%, Stertzer says.

But this is “mitigated by the majority in the House, who have shown a strong preference not to allocate additional revenues, particularly in this environment, on couples who have wealth starting in excess of $7 million,” he says.

“We continue to believe Sen. Baucus’ proposal strikes the right balance” on estate tax reform, Stertzer says.

The AALU also believes that employee compensation restrictions could be addressed this year.

“The climate is a very dangerous one and this issue is hard to predict,” Stertzer says.

One positive sign, he says, is that the Baucus proposal on nonqualified deferred compensation restrictions for Troubled Asset Relief Program recipients removed some of the most negative features from proposals considered in the past.

The restrictions now consist of a proposed annual deferral cap of $1 million, removing features that would, as a practical matter, have imposed a significantly lower limit, Stertzer says. “However, the proposal still does not include an exception for non-elective deferred compensation.”

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