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Financial Planning > Tax Planning > Tax Reform

New Ways & Means Chairman Seeks To Jump-Start Estate Tax Fix

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The new chairman of the House Ways and Means Committee wants to move quickly to resolve the estate tax issue, but believes the next step must be taken by the Senate, according to a spokesman.

Consistent with the comments of the House Democratic leadership, officials at the Association for Advanced Life Underwriting are telling members that the next thing to watch for in a situation where it is now unclear how a gridlocked Congress will act is whether Congress writes reconciliation instructions in the FY 2011 budget resolution.

In a note to members, Sarah Spear, AALU director of policy and public affair says that whether reconciliation is mandated “will be telling as to whether leadership will be able to move forward with tax legislation.”

That includes the estate tax, she says, because mandating reconciliation would mean that Senate passage of any tax legislation would require only 51 votes to pass.

The Ways and Means Committee spokesman, Matt Beck, said the House wants to use as the basis for negotiations legislation it passed last December that would extend the 2009 estate tax levels until 2012. These would include a $3.5 million individual exemption and a 45% top rate, retroactive to Jan. 1.

“The chairman believes the action is now in the Senate,” Beck said. “We will continue to work to formalize the legislation.”

In earlier comments, the chairman, Rep. Sander Levin, D-Mich., said the House “remains steady” with its stated position of retaining the 2009 levels.

At present there is no estate tax, but under current law it returns in 2011 to a $1 million per-person exemption and a 55% rate.

Tom Currey, president of the National Association of Insurance and Financial Advisors, is interpreting Levin’s comments as trying to “jump-start work on some sort of compromise.”

He adds that “the estate tax has been sitting there since January. If they don’t do something pretty soon, Congress may miss the boat here. We have to do something or it will go back to $1 million and 55%.”

Currey says the issue is important to NAIFA members. “They tell us anecdotally that it is now a little more difficult to get people who could potentially be affected by the estate tax to focus on this because they have to plan for at least three different scenarios.”

Specifically, he says, the first scenario is that “some people think it is gone forever. What they don’t remember is that it returns next year.”

The next scenario, he continues, “is that it indeed goes back to $1 million and 55%.”

That, Currey says, “is a worst case scenario for most taxpayers because then they have to do more planning than they really planned for.”

And the third scenario is a compromise, either a $2.5 million, or $3.5 million to $5 million exemption.

But, he cautions, “I don’t think it is a foregone conclusion to think that Congress will go as high as $5 million.”

As Beck noted, Currey says, “the key is not the House. The House has already passed legislation; it is the Senate that cannot come to grips with this.

“Levin is trying to get the Senate to do something,” Currey says. “The farther this goes on, the people who want a low exempt amount gain political strength and the people who want the $5 million amount lose strength.”

“The farther this goes on, the less likely that an exemption rate higher than $1 million becomes law going forward,” he says, adding that, “Congress doesn’t have to lift a finger for that to occur.”

Spear says AALU officials are telling members that the “the easiest type of reform, taking into account the congressional schedule and the focus on deficit reduction, would be to pass a two-year patch of estate tax law at the 2009 parameters through 2011.”

But, she says, in visits to 34 Senate offices, “AALU lobbyists have learned that Senators are still searching for a permanent compromise between the 2009 parameters and a $5 million exemption and a 35% rate.”

She says members of the Senate are hesitant to write reconciliation instructions “coming off the heels of the health care reconciliation bill.”

But, “if reconciliation instructions are not written, we will remain in the difficult predicament we currently observe-the tenuous task of finding a compromise between the parameters outlined above and revenue offsets that would garner 60 votes needed to pass a bill under regular order,” she says.

“The difficulty in finding 60 votes may lead to either (1) reversion in 2010 to a $1 million exemption and 55% rate or a short-term extension of tax cuts, including the estate tax on a two-year basis at a $3.5 million exemption and a 45% rate, possibly during a lame duck session (when Congress returns after November elections).”

In general, the insurance industry supports “reasonable” estate tax reform, which it sees in the range of $3.5 million/$5 million exemption and a 35%/45% maximum tax rate.

But, the industry also seeks other provisions, such as indexing the exemption level for inflation.

Other provisions sought by the industry are the reunification of the estate and gift tax and providing so-called “portability,” which would permit a surviving spouse to carry over any credit left over by the first spouse to die.


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