United States: Legislation Affecting Federal Estate And Gift Tax

Congress is rapidly running out of time to address the "disappearing" estate tax set to occur on January 1, 2010, so individuals should stay abreast of the latest developments.

As the law currently stands, the federal estate tax will disappear January 1, 2010, and then re-emerge in 2011 with the threshold for taxation lower than has been seen in nearly a decade. The law currently slated to take effect in 2011 provides for an estate tax exemption of $1 million per person and a tax rate as high as 55 percent. The current regime provides for a $3.5 million estate tax exemption per person and a tax rate as high as 45 percent. In light of the current state of the budget, it is unlikely that Congress will let the estate tax expire next year. Nor is it likely that Congress will bring back the higher tax levels not seen since 2001. Thus, the question remains, just what is Congress going to do?

While it is impossible today to know for certain what final estate and gift tax legislation will provide, the pending legislation introduced in the House of Representatives and the Senate provides some insight into the changes being contemplated. Summarized below are several of the proposals that have captured the greatest levels of attention from both the general public and tax planners.

In general, these pending proposals tend to address (or not address) the following key aspects of estate and gift tax legislation:

Repeal: Whether to permanently repeal the estate tax or to continue the estate and gift tax regime

Estate Tax Exemption: What amount each person should be permitted to pass free of estate tax, and whether the amount should be indexed for inflation

Top Tax Rate: Which top tax rate to impose on estates and gifts in excess of the exemption amounts

Unification of Estate and Gift Tax Exemptions: Whether to unify the estate and gift tax exemptions, so that each person has a total exemption amount that he or she may use to make gifts during life or bequests at death (While the current estate tax exemption is $3.5 million, the gift tax exemption is $1 million.)

Portability: Whether to permit a surviving spouse to use a deceased spouse's unused exemption amount (For example, today a married couple theoretically could pass $7 million in assets estate tax-free, by utilizing each spouse's $3.5 million exemption. However, if the first spouse to die only had $2 million in assets, and the surviving spouse had $5 million in assets, the first spouse could not transfer his or her unused $1.5 million exemption to the second spouse. The surviving spouse's estate would be subject to estate tax on $1.5 million—$5 million in assets reduced by the $3.5 million exemption. The proposed portability provisions would allow the unused exemption amount of the first spouse to die to pass to the surviving spouse, allowing a married couple to maximize the use of their available exemptions, regardless of how their assets are held as between themselves.)

Basis in Inherited Property: Whether to continue to provide for a step-up in basis for inherited property or to continue carryover basis, which presently is scheduled to apply only for 2010 (Under current law, the basis in a decedent's assets is "stepped-up" to date of death values so the assets can be sold without a taxable gain. With "carryover basis," as the name implies, basis does not change at the decedent's death.)

Discounts: Whether to eliminate certain discounts, such as discounts for lack of marketability and for minority interests, applicable when valuing entities that are owned by related parties, to the extent such entities own passive investments

The characteristics of the most widely discussed proposals are detailed below. To view a summary table of the characteristics of the proposals, please click here. To view a table of all pending proposals to modify the federal estate and gift tax, please click here. As Congress introduces additional proposals, the charts will be updated accordingly, so please be sure to check back here regularly.

Obama Administration

The Obama administration, as part of its budget proposal, favors reforming the estate and gift tax as follows:

Repeal: No permanent repeal

Estate Tax Exemption: $3.5 million, indexed beginning in 2011

Top Tax Rate: 45 percent

Unification of Estate and Gift Tax Exemptions: No; gift tax exemption to remain at $1 million

Portability: No

Basis in Inherited Property: Retain current rule to step-up basis at death

Discounts: n/a

The Obama administration's proposal also would limit the effectiveness of grantor retained annuity trusts (GRATs), a popular wealth transfer tool. The proposal would require a minimum 10-year term for each GRAT. Because GRATs fail if the grantor dies during the term, the longer required term would increase the probability of failure.

The Pomeroy Bill (H.R. 436)

On January 9, 2009, Rep. Earl Pomeroy (D-ND) introduced the first bill of the current Congress addressing estate and gift tax reform. The key features of the Pomeroy Bill are as follows:

Repeal: No permanent repeal

Estate Tax Exemption: $3.5 million, no indexing

Top Tax Rate: 45 percent; a surtax applies to estates over $10 million, designed to phase-out the estate tax exemption and rates below 45 percent

Unification of Estate and Gift Tax Exemptions: No; gift tax exemption to remain at $1 million

Portability: No

Basis in Inherited Property: Retain current rule to step-up basis at death

Discounts: Restrictions on discounts for transactions involving entities owned by related parties, to the extent such entities own mainly passive investments

The Mitchell-Kirk-Nye Bill (H.R. 498)

On January 14, 2009, Rep. Harry Mitchell (D-AZ), Rep. Mark Kirk (R-IL) and Rep. Glenn Nye (D-VA) introduced H.R. 498, also known as the Capital Gains and Estate Tax Relief Act of 2009. The key features of H.R. 498 are as follows:

Repeal: No permanent repeal

Estate Tax Exemption: $3.75 to $5 million from 2010 to 2015, indexed beginning in 2016

Top Tax Rate: Capital gain tax rate for estates up to $25 million (presently 15 percent); double the capital gain tax rate for estates over $25 million (30 percent)

Unification of Estate and Gift Tax Exemptions: Yes

Portability: Yes

Basis in Inherited Property: Retain current rule to step-up basis at death

Discounts: n/a

The Baucus Bill (S.722)

On March 26, 2009, Senate Finance Committee Chairman Max Baucus (D-MT) introduced S.722, called the Taxpayer Certainty and Relief Act of 2009. Title III of this proposal is entitled "Permanent Estate Tax Relief." The key features of the Baucus Bill are as follows:

Repeal: No permanent repeal

Estate Tax Exemption: $3.5 million, indexed

Top Tax Rate: 45 percent

Unification of Estate and Gift Tax Exemptions: Yes

Portability: Yes

Basis in Inherited Property: Retain current rule to step-up basis at death

Discounts: Maximum value reduction of $3.5 million for farm and business assets

One should note that the Baucus Bill in its current status cannot be adopted, as tax legislation must originate in the House of Representatives. However, all or part of the bill could be added as a Senate amendment to a House-passed tax bill.

The McDermott Bill (H.R. 2023)

On April 22, 2009, Rep. Jim McDermott (D-WA), the fourth most senior Democrat on the House Ways and Means Committee, introduced H.R. 2023, called the Sensible Estate Tax Act of 2009. The key features of the McDermott Bill are as follows:

Repeal: No permanent repeal

Estate Tax Exemption: $2 million, indexed beginning in 2011

Top Tax Rate: 45 percent for estates up to $5 million, 50 percent for estates of $5 to $10 million, and 55 percent for estates over $10 million

Unification of Estate and Gift Tax Exemptions: Yes; gift tax exemption to increase to $2 million

Portability: Yes

Basis in Inherited Property: Retain current rule to step-up basis at death

Discounts: n/a

What You Should Do

Congress is rapidly running out of time to address the "disappearing" estate tax set to occur on January 1, 2010. Although the House and Senate have introduced numerous bills, none has yet passed into law. Given the approaching deadline, check here regularly to stay abreast of the latest developments.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions