Advisors and their clients are one step closer to clarity for estate planning, at least for the next two years, now that both the House and Senate have passed The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. Following passage of the bill late Thursday night in the House of Representatives, the bill goes to President Barack Obama, who is sure to sign the bill into law since it was his compromise agreement with Republican congressional leaders that was passed by both houses.
In addition to extending the Bush-era JGTRRA and EGTRRA tax cuts on income, capital gains and dividends, the estate tax provisions in the bill that House Democrats tried and failed to amend—via an amendment by Rep. Earl Pomeroy (D-ND)—include a $5 million exclusion ($10 million for married couples), and a top estate tax rate of 35%. Like most of the other provisions in the bill, the estate tax exclusions and tax rates will expire two years from now—in another election year, as pointed out by Investment Adviser Association (IAA) executive director David Tittsworth (left) in a Thursday interview exploring the ramifications of the tax bill process for advisors.
Pomeroy’s failed amendment was a last-ditch attempt by liberal Democrats in the House to decrease the estate tax exclusion to $3.5 million, and institute a top rate of 45%. The amendment failed late Thursday night by a vote of 233-194.
Speaking Tuesday before final passage of the bill in the Senate as well as the House, noted advisor Harold Evensky (left), president of Evensky & Katz Wealth Management, said in an interview, “If it goes through as proposed…it’ll mean, for most of us, that the estate tax has become less and less of a problem.”
Also speaking on Tuesday, before passage of the bill in both houses of Congress, advisor Diahann Lassus, of Lassus & McWherley Wealth Management, said that what "really surpised" her was the bill's provisions "giving us a choice for 2010."
Lassus (left) points out that for the "estates of people that are “not super-wealthy” and who passed away in 2010, “their families could really benefit" from having a step-up basis "instead of the carryover basis" that was the rule for 2010 with the sunset of the estate tax at the end of 2009.
(See complete interview on the estate tax with both advisors.)
The estate tax that had been set to roar back on Jan. 1, 2011, would have included a top rate of 55% and a lower estate exclusion amount.
The estate tax package in the Senate bill that was approved by the House on Thursday included the following provisions, to begin Jan.1, according to a CCH Tax Briefing Bulletin:
- 35% maximum estate-tax rate
- $5 million exclusion for individuals; $10 million for married couples
- Stepped-up basis for “all assets included in the gross estate”
- Repeal of carryover basis (used in 2010 on capital gains in estates)
- Heirs can choose, for those who died during 2010, “carryover basis rules under EGTRRA or the revived stepped-up basis rules under the bill.”
- Spouses can choose to use the “unused portion of the estate tax exclusion,” of the spouse who died before them
No matter what the rate and exclusion are, what actually is paid after effective
estate planning may be entirely different.
In a recent commentary, regular AdvisorOne blogger Andrew Rice of some firm cites statistics that place the actual estate tax rates much lower back in 2001, when the top tax rate on estates was higher—that same 55% that would have returned absent Congressional action on Jan. 1, 2011.
Advisors continue to clarify the now the estate tax options for 2010. The bill as approved by the Senate on Wednesday and House on Thursday added a choice for heirs of those who died in 2010, when there was no “estate” tax, since it had sunsetted on Dec. 31, 2009, under the JGTRRA Bush tax cut bill, but there was a capital-gains tax on the estate’s assets, based on a sometimes difficult-to-comply-with “modified carryover basis.” Now heirs can choose either the “modified carryover basis” for the estate’s capital gains or the stepped-up basis that is the Senate’s provision for the estate tax for 2011 and 2012.
The law firm Proskauer explored the nuances of that choice in its “H.R. 4853 Summary and Planning Points,” released on Monday: