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Financial Planning > Tax Planning > Tax Reform

H.R. 4853: Bipartisan Deal Would Set Estate Tax Rate at 35%

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WASHINGTON BUREAU — A bipartisan tax agreement unveiled by the Senate last night would be generous to taxpayers who die leaving large estates.

The agreement would add to the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 to H.R. 4853, an airport and airway trust fund tax bill. The act added to H.R. 4853 would be a modified version of a tax deal negotiated by Obama administration officials and Republican Senate leaders.

House Democrats have referred their version of the proposal to committee and are demanding changes, especially in the estate tax provisions.

Senate Democratic leaders are seeking to schedule vote on the Senate’s version of Harry Reidthe measure Monday.

A summary of the H.R. 4853 amendment released by Senate Majority Leader Harry Reid, D-Nev., shows that the 74-page measure would:

  • Set a $5 million generation-skipping transfer tax exemption and 0% rate for 2010.
  • Set, for the next 2 years, the per-person estate tax exemption at $5 million and the maximum estate tax rate at 35%. There is no estate tax, but the tax is set to return to 2001 levels in 2011. In 2009, there was a $3.5 million per spouse exemption and a 45% top tax rate. In 2001, there was a $1 million exemption and a 55% top rate.
  • Provide for “portability,” or easing the complicated estate planning documentation necessary to ensure that beneficiaries of an estate get the benefits of a couple’s exemption. The proposal would let an executor of a deceased spouse’s estate transfer any unused exemption to the surviving spouse without such planning. The proposal would be effective for estates of decedents dying after Dec. 31, 2010.
  • Bring estate taxes and gift taxes back together. Before the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) took effect, a single graduated rate schedule applied to both types of taxes, and a single lifetime exemption could be used for gifts or bequests. EGTRRA, the law that called for phasing the estate tax out by 2010, also separated the estate tax and gift tax systems. The reunification provision in the new bipartisan tax deal would take effect for gifts made after Dec. 31, 2010.
  • Index the estate tax exemption starting in 2012.

Most provisions in the proposal would be effective Jan. 1, 2010.

The agreement also would provide a lucrative benefit for families of people who die in 2010, by letting them receive a step-up in basis for their estates even though there was no estate tax in 2010.

Under the laws in effect today, the estates of people who die this year would pay no federal estate taxes. But the heirs of those decedents would lose the right to use an estate tax law provision that lets estate beneficiaries who sell inherited property pay taxes based on the value of the property on the date of the decedent’s death.

Although most proposal provisions would be effective Jan. 1, 2010, the proposal would let taxpayers choose between using the rules created by the new agreement or having no estate tax and a modified carryover basis for estates arising in calendar year 2010.

Some of the other proposal provisions would deal with matters such as an extension of unemployment insurance benefits, a cut in the payroll tax, and charitable distributions from individual retirement accounts.

Terry Headley, president of the National Association of Insurance and Financial Advisors, Falls Church, Va., says passage of the proposed reunification of the estate and gift tax systems would, for at least 2 years, help provide certainty and flexibility for taxpayers in need of planning.

“NAIFA has been recommending this step since Congress decoupled the two aspects of planning in 2001,” Headley says.

Because the estate and gift tax rules proposed would be retroactive, NAIFA is pleased to see that the agreement would let the heirs of taxpayers who die in 2010 choose to stick with having no estate tax and a modified carryover basis, Headley says.

Sarah Spear of the Association for Advanced Life Underwriter (AALU), Reston, Va., says AALU believes the reunification provision would remove an artificial barrier that inhibits earlier intergenerational transfers of business interests and other assets.

“We continue to work with lawmakers to reiterate the importance of sustainable estate tax reform in the range of 2009 law, as well as the importance of reunifying the gift and estate tax levels as these important discussions move forward,” Spear says.


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