There are currently three main bills in Congress dealing with estate tax reform.
One bill is 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-W.V.
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, both to clients and industry officials as small businesses.
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 increase economic growth, industry officials say.
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 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 if an individual used up the $3.5 million exemption through gifts, he or she would no longer have an estate tax exemption, says Sarah Spear, director of policy and public affairs at the Association for Advanced Life Underwriting.
Portability is the transfer of a deceased spouse’s unused exemption to the surviving spouse. Specifically, under current law, each citizen has a $3.5 million exemption. Current law in essence penalizes a married couple that does not set up a credit shelter trust because the combined amount of $7 million is not utilized without adequate legal planning.
Portability would provide that the unused portion would automatically roll-over to the surviving spouse, as long as the executor makes a selection on the estate, Spear says.
“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 says, adding that this is what the industry is arguing to members of Congress in justifying inclusion of the provision in final legislation.