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Financial Planning > Trusts and Estates > Estate Planning

H.R. 4853: Obama, Reid Win Senate Cloture Vote

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WASHINGTON BUREAU — The Senate has voted to proceed with debate on the tax deal President Obama worked out with top Republicans.

Snow slowed voting to a glacial pace, but Senate Majority Leader Harry Reid, D-Nev., rounded up enough support to prevent a filibuster, or endless round of debate by opponents of the deal, which is taking the form of an amendment that would be added to H.R. 4853, a bill that was originally an airport and airways trust fund tax bill.

Reid needed at least 60 votes to pass a motion for cloture, or limit on debate, that would holdHarry Reid debate on the tax measure to 30 hours. Senators took more than 3 hours to vote 83-15 for cloture.

A final vote on the tax measure could take place sometime this week, according to aides in Reid’s office.


Section 750 of the tax measure would extend the active financing income sections in Internal Revenue Code sections 953 and 954 for 2 years.

The rules would affect how U.S. shareholders with large stakes in foreign life and annuity operations calculate their U.S. taxable income.

In some cases, if the Internal Revenue Service (IRS) thinks foreign life and annuity reserve rules are appropriate, the IRS will let a life company use the foreign statement life and annuity reserve figures as the reserve figure for U.S. tax purposes, according to an Obama tax deal summary provided by the congressional Joint Committee on Taxation.

Section 750 of the Obama tax deal would extend “the present-law temporary exceptions from subpart F foreign personal holding company income, foreign base company services income, and insurance income for certain income that is derived in the active conduct of a banking, financing, or similar business, or in the conduct of an insurance business,” officials say.

The provision would be effective for taxable years of foreign corporations beginning after Dec. 31, 2009, officials say.


Because of the quirks of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), current law states that people who die this year will pay no federal estate taxes, but estates would lose use of a provision that normally would let estate beneficiaries who sell inherited property pay taxes based on the value of property on the date of death.

Estate taxes are supposed to return to 2001 levels Jan. 1, 2011, with a $1 million exemption and a 55% top rate.

The estate tax section of the Obama tax deal would establish a $5 million per-person exemption and set the maximum estate tax rate at 35%.

The Obama tax deal would provide for “portability,” or reducing the amount of complex estate planning documentation necessary to ensure that beneficiaries of estates get the benefits of a couple’s exemption.

If the deal takes effect as written, an executor of a deceased spouse’s estate could 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.

EGTRRA split treatment of estate and gift taxes; the Obama deal would provide for reunification. Reunification would be effective for gifts made after Dec. 31, 2010.

A 2010 transition rule would make an estate subject to the 35% rate if the taxable estate exceeded $5 million, according to Alban Salaman, a trusts and estates lawyer in the Washington office of Holland & Knight L.L.P.

But, an estate that did not want to pay estate tax could instead choose to be subject to modified carry-over basis rules, Salaman says.

Salaman says the modified carry-over basis would mean that, in general, “instead of using date-of-death values for estate assets in determining gain or loss on the sale of assets,

the estate uses the decedent’s cost basis.”

There is an exception for smaller estates, Salaman says. For spouses who inherit estate assets, the basis could be increased by up to $3 million for gains, and the estate could increase basis for other heirs up to $1.3 million.

The decision to reunify the estate and gift taxes, combined with the $5 million per person exemption, “will avoid a lot of gift tax issues” families currently face when dealing with trust and estate issues, Salaman says.

He says the provision also could help persons who use an insurance policy within a trust, or “Crummy power,” to reduce the cost of probating an estate.

Current law reduces the size of the annual premium the creator of the trust can pay without paying a gift tax on the premium. The estate tax provision now under consideration would “be a major benefit to those who want to avoid paying gift taxes on the premiums used to maintain insurance policies within trusts,” Salaman says.


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