{"id":1578,"date":"2009-03-27T15:43:00","date_gmt":"2009-03-27T19:43:00","guid":{"rendered":"https:\/\/actec.matrixdev.net\/?post_type=capital-letter&p=1578"},"modified":"2024-01-05T14:59:23","modified_gmt":"2024-01-05T19:59:23","slug":"estate-tax-proposals-from-the-finance-committee-chairman","status":"publish","type":"capital-letter","link":"https:\/\/actec.matrixdev.net\/capital-letter\/estate-tax-proposals-from-the-finance-committee-chairman\/","title":{"rendered":"Estate Tax Proposals from the Finance Committee Chairman"},"content":{"rendered":"\n

An important Senate bill would make 2009 estate tax law permanent, reconform the gift tax to the estate tax, and make the estate and gift tax unified credit portable between spouses.<\/strong><\/em>

<\/p>\n\n\n\n

Dear Readers Who Follow Washington Developments:<\/p>\n\n\n\n

Those of us who expect a permanent estate tax legislative solution to most likely come from \u201cSenators in the middle\u201d (see Capital Letters\u00a08<\/a>\u00a0and\u00a09<\/a>) pay close attention to Chairman Max Baucus (D-MT) of the\u00a0Senate Finance Committee<\/a>. Thus, on March 26, 2009, when Senator Baucus introduced the\u00a0Taxpayer Certainty and Relief Act of 2009 (S. 722), including Title III captioned \u201cPermanent Estate Tax Relief,\u201d it was significant.<\/p>\n\n\n\n

Permanent Rates and Exemptions<\/strong><\/p>\n\n\n\n

Not surprisingly,\u00a0S. 722\u00a0would make permanent the current $3.5 million estate tax applicable exclusion amount and 45% rate. This is consistent with the Obama Administration\u2019s budget proposals. It would again fully unify the gift tax with the estate tax by providing a single exclusion amount of $3.5 million, and it would also make the cap on the reduction of value under the special use valuation provisions of\u00a0section 2032A<\/a>\u00a0equal to the applicable exclusion amount. Beginning in 2011, it would index the applicable exclusion amount for inflation.

S. 722\u00a0would also make permanent the other transfer tax changes made by the\u00a0Economic Growth and Tax Relief Act of 2001<\/a>, including the rules affecting the allocation of GST exemption. And it would provide for the long-awaited \u201cportability\u201d of the unused gift and estate tax unified credit of a deceased spouse to the surviving spouse and the surviving spouse\u2019s estate.<\/p>\n\n\n\n

Historical Perspective<\/strong><\/p>\n\n\n\n

The Capital Letter series was launched in the last months of the Republican-led Congress in 2006, not long after a Senate \u201ccloture\u201d vote had fallen short of the 60 votes needed to take up consideration of\u00a0H.R. 5970, the\u00a0\u201cEstate Tax and Extension of Tax Relief Act of 2006\u201d (\u201cETETRA\u201d). An explicit commitment of\u00a0Capital Letter No. 1<\/a>\u00a0was to monitor what, if anything,\u00a0ETETRA\u00a0might teach us about future estate tax legislation. Compared to\u00a0ETETRA, there are five important differences in\u00a0S. 722. The exemption is frozen at $3.5 million;\u00a0ETETRA\u00a0would have raised it over a five-year period to $5 million. The rate remains 45%;\u00a0ETETRA\u00a0would have reduced the top rate over five years to 30% and would have applied a rate equal to the capital gain tax rate on amounts below $25 million. The\u00a0section 2058<\/a>\u00a0deduction for state death taxes is retained;\u00a0ETETRA\u00a0would have repealed it. And, as stated, unlike\u00a0ETETRA,\u00a0S. 722\u00a0removes the 2011 \u201csunset\u201d on all transfer tax changes and ties the cap on the special use valuation reduction to the applicable exclusion amount.

Currently, the cap on the special use valuation reduction is $1 million, which is the stated statutory cap of $750,000, indexed for inflation since 1999. Under\u00a0S. 722, it would be raised to $3.5 million, indexed after 2010. In effect,\u00a0S. 722\u00a0would double the exemption for estates containing the right mix of farm or other special use property.<\/p>\n\n\n\n

Portable Unified Credit<\/strong><\/p>\n\n\n\n

The portability provisions of\u00a0S. 722\u00a0are identical to those in\u00a0ETETRA, except that the iterative portability of the unified credit to spouses of spouses is prohibited. In other words, if Husband 1 dies after 2009 without using his full exclusion amount, and his widow, Wife, marries Husband 2 and then dies, Wife\u2019s estate could use her own exclusion amount plus whatever amount of Husband 1\u2019s exclusion amount was not used. Husband 2\u2019s estate could use his own exclusion amount plus whatever amount of Wife\u2019s basic exclusion amount was not used. But Husband 2\u2019s estate could not use any of Husband 1\u2019s unused exclusion amount transmitted through Wife\u2019s estate. (Portability techies call this \u201crequiring privity.\u201d) Husband 2\u2019s estate could still use the unused exclusion amount of any number of his predeceased wives (and\u00a0S. 722\u00a0would make that explicit), subject only to the overall limitation that the survivor\u2019s exclusion amount could be no more than doubled.

ACTEC recommended other changes to the\u00a0ETETRA\u00a0portability rules that are not incorporated in\u00a0S. 722. For example,\u00a0S. 722\u00a0does not extend portability to the GST tax; this has probably been given about as much congressional staff attention as can be expected and is unlikely to change.\u00a0S. 722\u00a0still requires an affirmative election of portability on the estate tax return of the predeceased spouse; practitioners who remember bad experiences with other elections in the past will no doubt continue to criticize this requirement and advocate an election-out approach or at least a recognition of late elections, but the underlying requirement that a return be filed for the first spouse to die is unlikely to be relaxed.

S. 722\u00a0does retain a provision that the \u201c[t]he Secretary shall prescribe such regulations as may be necessary or appropriate to carry out this subsection,\u201d and that will provide a welcome second opportunity to address issues of administrability. ACTEC recommended adding \u201cthe purposes of\u201d before \u201cthis subsection\u201d to clarify Treasury\u2019s ability to ease the administration of portability by \u201clegislative regulations\u201d (as in\u00a0section 2663<\/a>\u00a0with respect to the GST tax), but perhaps the congressional drafters believe that to be unnecessary.

Even if some form of portability is enacted, many of our clients will continue to use credit shelter trusts, in order to exclude from the surviving spouse\u2019s gross estate what many hope to see as appreciation in the future (recognizing the impact of that choice on basis), and of course to allocate GST exemption if portability remains limited to the gift and estate taxes. But portability is both popular and \u201cpopulist\u201d (in the political sense), because it will mostly benefit folks at the lower end of estate tax payers \u2013 the closest the estate tax comes to a \u201cmiddle class\u201d impact.<\/p>\n\n\n\n

Broad Appeal and Support<\/strong><\/p>\n\n\n\n

As \u201cmiddle class\u201d tax relief,\u00a0S. 722\u00a0would also address the individual alternative minimum tax, the regular and capital gains tax rates for lower- and middle-income taxpayers, the child tax credit, marriage penalty relief, the dependent care credit, the adoption credit and adoption assistance programs, and the earned income tax credit. That grouping of hot topics, plus the support the bill has \u2013 in addition to Chairman Baucus, it is cosponsored by two other\u00a0Finance Committee<\/a>\u00a0Democrats, Senators Rockefeller (D-WV) and\u00a0Schumer (D-NY)<\/a>\u00a0\u2013 make\u00a0S. 722\u00a0a serious legislative proposal.

S. 722\u00a0will not be enacted. Tax legislation, we remember, must originate in the House of Representatives. But we should watch it to see if it attracts full or partial support of other\u00a0Finance Committee<\/a>\u00a0members, perhaps including Republicans, and to see how it is received and treated by the Senate leadership. Significant traction for\u00a0S. 722\u00a0will be noticed by those who draft tax legislation in the House, especially since it includes AMT relief, which is a priority for Chairman Rangel (D-NY) of the\u00a0Ways and Means Committee<\/a>. Alternatively, all or part of\u00a0S. 722\u00a0could be added as a Senate amendment to a House-passed tax bill. Either way, with 2009 already one-fourth gone, and with less urgency about the estate tax currently exhibited in the House, this could be an important step toward the stability we have sought for almost eight years.\u00a0 Ronald D. Aucutt \u00a0 <\/p>\n\n\n\n

\u00a9 2009 by Ronald D. Aucutt. All rights reserved<\/p>\n","protected":false},"excerpt":{"rendered":"

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