Congress Set To Vote on Dramatic Changes to Estate & Gift Taxes

After years of speculation, it is expected that before year's end Congress will vote on the compromise tax legislation hashed-out between President Obama and Congressional Republicans.  Incorporated in the legislation are dramatic changes to the federal estate & gift tax rules.  With much thanks to information disseminated by national expert Bob Keebler, here is a summary of the key modifications:

• The individual exemption amount for estate, gift and GST tax for 2010, 2011 and 2012 would be $5 million per person, $10 million per couple.
• The estate, gift and generation skipping tax rate will be 35% through 2012
• Beginning in 2011 the exemption amount will be indexed for inflation
• Estates of descendants dying in 2010 can choose either to apply the estate tax rules or the modified carryover basis rules that have been effect under the estate tax "repeal" for 2010
•  In a significant change from prior law, there will be "portability" of the individual estate tax exemption from one spouse to another; that is, a decedent's executor can transfer any unused exemption amount to the surviving spouse without the requirement that the deceased spouse's exemption amount pass into a credit shelter trust
• The estate and gift tax exemption will be "reunified" beginning in 2011

If it passes, the legislation will make only truly large estates subject to federal estate and gift tax liability.  Note, however, that for residents of states (like New York) that have "decoupled" from the federal estate tax regime, much smaller estates will remain subject to a state estate tax.  In New York, for example, the state estate tax exemption will continue to remain at $1 million per person. For a decedent with a $2 million estate, the New York State estate tax in 2011 would be $99,600.

Also, the new law will again "sunset" this time at the end of 2012.  So, depending upon which way the political winds blow, we could very well find ourselves in a similar state of uncertainly in 24 months. But in the meantime, the proposed legislation will provide a number of wonderful tax planning opportunities for larger estates.  And, those with "smaller" estates should not put-off estate planning even though they may believe they no longer have estate tax concerns. All the standard personal planning goals -- asset protection, divorce protection, catastrophic health protection, disability planning, long-term care planning -- remain as important as ever.

Billionaire Estate Tax Surtax Proposed

Three Democratic Senators, led by Bernie Sanders of Vermont, are sponsoring legislation to include a 65% "billionaire surtax" for estates in excess of $500 million. The trio makes the argument that in an era of increasing federal debt, the largest estates should pay their "fair share."

Although it is unclear in this article, it appears that the intent of this proposal would be to add this surtax on top of whatever estate tax is ultimately enacted by Congress.

The proposal would also make the estate tax retroactive to January 1, 2010; such a result would almost certainly lead to constitutional challenges from estates that, at present, would have no federal estate tax obligation in 2010.

Federal Estate Tax Legislation? Not So Fast!

Just last week it appeared that a deal had been reached in the Senate Finance Committee to submit new Estate Tax legislation for a Senate vote. The proposal would have brought back the $3.5 million per person exemption that was in effect in 2009, but indexed for inflation. The proposal would have also allowed for the "prepayment" of estate tax at a lower rate (the highest rate would be 45%).

But The Hill is reporting that the agreement between the parties has collapsed. Apparently Senate Democrats on the Committee are refusing to submit the proposal for a vote unless they know that they have a majority of party members in support -- which apparently is not the case.

Interesting, Senator Kyle is quoted as discussing Estate Tax "reform" rather than "repeal"; clearly, repeal is a dead issue unless the Republicans take bake the White House and both Houses of Congress, with a filibuster proof majority in the Senate. Recognizing that is unlikely, Republicans are willing to accept as large an exemption amount as they can get under the present political and economic realities.

So, the dance continues ...