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Financial Planning > Tax Planning > Tax Reform

Estate Tax Reform Delay Likely

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Congress most likely will extend 2009 estate tax rates for one year as it continues to seek consensus for comprehensive estate tax reform, according to industry officials.

The issue is critical because under current law, estate taxes will expire for 2010, at a huge cost in government revenues, returning to 2001 levels in 2011.

Under current law, the 2011 exemption would be $1 million per person, with a 55% maximum tax rate. For 2009, the estate tax levy carries a $3.5 million per-person exemption and a 45% tax maximum tax rate.

The consensus is that Congress will ultimately decide to retain the 2009 levels as the base for permanent tax reform, indexed for inflation.

But the precise language remains to be negotiated.

In fact, the House is considering passing a so-called “one year patch” when it returns in September, according to Sarah Spear, director of policy and public affairs at the Association for Advanced Life Underwriting.

“It is a completely different story in the Senate,” Spear said. “Senators want permanent reform, but may not have the time to get to it.”

That’s because details of permanent estate tax reform “still need to be ironed out because of the constituency that is pushing for higher exemption and lower rates” than most members believe is fiscally appropriate, Spear said.

AALU continues to advocate for the sound tax policy of reunification and portability as part of any permanent estate tax reform.

The 3 key bills dealing with estate tax reform include S. 722, introduced in the Senate in March by Sen. Max Baucus, D-Mont., chairman of the Senate Finance Committee.

The bill is a middle-class tax reform package that includes an estate tax proposal that would freeze the exclusion and rate at 2009 levels, reunify the estate and gift tax credit, allow for portability and index it for inflation. The bill’s co-sponsors are Sen. Charles Schumer, D-N.Y., and Sen. Jay Rockefeller, D-West Va.

In the House, H.R. 2032, sponsored by Rep. McDermott, D-Wash., would make permanent the exemption level at $2 million, index that level for inflation, and establish progressive tax rates of 45% for estates valued between $2 and $5 million; 50% for estates valued at $5 to $10 million; and 55% for estates valued over $10 million.

This bill also includes reunification, portability, the state estate tax credit, and indexing for inflation.

Another House bill is H.R. 436, introduced by Rep. Earl Pomeroy, D-N.D. It would freeze the exclusion and rate at 2009 levels and reunify the estate and gift tax credit. The bill would, however, limit the valuation discount for family limited partnerships and set forth valuation rules for transfer of non-business assets.

Besides the basic tax rate and exemption levels, reunification and portability provisions are critical to the insurance industry, clients and small businesses, industry officials say.

Reunification of gift and estate tax exemptions would simplify estate planning by removing an artificial barrier that inhibits earlier intergenerational transfers of business interests and other assets, and would increase economic growth, according to industry officials.

Currently, the gift tax exemption is capped at $1 million, while the estate tax exemption is $3.5 million. Reunification would elevate the amount an individual could provide as a tax-free gift during a lifetime to $3.5 million.

Reunifying the lifetime credit would not give an individual $7 million for gift and estate transfers. Rather, the code would provide that an individual who used up the $3.5 million exemption through gifts would no longer have an estate-tax exemption, according to Spear.

Portability is the transfer of a deceased spouse’s unused exemption to the surviving spouse. Under current law, each citizen has a $3.5 million exemption. The law in essence penalizes a married couple who does not set up a credit-shelter trust ,because the combined amount of $7 million is not used without adequate legal planning.

Portability would allow the unused portion to roll over automatically to the surviving spouse, as long as the executor makes a selection on the estate, according to Spear.

“This would simplify estate planning and estate administration for married couples, carry out our clients’ nontax goals and increase consistency with existing tax policy without creating any new tax benefit,” she said.


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