I recently received an Estate Tax update from The Estate Plan (TEP). TEP cited Leimburg Associates, Inc as the source of the following information. Here is my summary.
Currently, if you die in 2009, the Federal Government will not tax your estate unless your net worth is over 3.5 million. After this individual exemption, a maximum tax rate of 45% applies. If you die in 2010, there is no death tax regardless of the value of your estate; there are rumblings that the House of Representatives may extend the 2009 schedule for one year, but the Senate wants a much larger exemption and significantly lower rates.
Currently, beginning in 2011, the death tax will come back with an exemption of 1 million per individual and a top tax rate of 55%. It is highly unlikely that Congress will do nothing since these 2010 and 2011 numbers seemed so far away when the estate tax laws were modified.
There are three key estate tax bills floating out there: Senate Bill 722, House Bill 2032 and House Bill H.R. 436.
Senate Bill 722 would make permanent the 2009 3.5 million exclusion and the top 45% tax rate. The bill will also reunify the estate and gift tax credit, allow for the transfer of a deceased spouse’s unused exemption to the surviving spouse and index the exemptions for inflation.
House Bill 2032 will make permanent the exemption level at 2 million, index that level for inflation and establish a progressive tax rate of 45 percent for estates valued between 2-5 million, 50 percent for estates valued at 5-10 million and 55 percent for estates over 10 million. The bill will also reunify the estate and gift tax, create exemption portability, restore the state estate tax credit and provide indexing for inflation.
House Bill 436 would freeze the exclusion and tax rate at the 2009 levels, reunify the estate and gift tax so that the cap on tax free lifetime gifts would go from the present 1 million to 3.5 million, limit the valuation discount for family limited partnerships and provide strict valuation rules for transfer of non business assets.
The Congressional Budget Office has a report out that offers four additional options.
Alternative 1 would set the exemption for the combined tax at 5 million starting in 2010, index that for inflation, set the tax rate equal to the top tax rate on capital gains, allow stepped-up basis for assets transferred from a decedent and deny a deduction or credit for state death taxes.
Alternative 2 would be the same changes as 1, but apply a two tiered rate where the first 25 million transferred would be taxed at the highest capital gains rate. Anything above 25 million would be taxed at 30% and indexed for inflation.
Alternative 3 would retain the 3.5 million exemption, index that for inflation, set the top tax rate at 45%, retain the step up in basis and allow a deduction for state death taxes.
Alternative 4 repeals the estate tax in 2010, retains the 1M gift tax exemption and institutes a carryover basis regime.
With respect to the four CBO options, Ron Aucutt of McGuire Woods, LLP points out that “CBO reports like this, which are issued from time to time, are usually routine contributions to the data available to Congress. They analyze the estimated spending and revenue impacts of proposals known to be under consideration or seriously proposed. They typically do not develop new options on their own or make recommendations among options. Usually, the reports get relatively little public attention. But this time, presumably because of the high political profile of the cost of health care reform and the recent political spotlight on the CBO (including the unusual invitation of the CBO Director to the White House), this report inevitably has a higher profile. As with past reports, it purports only to analyze known options for altering federal spending and revenues.”