The Estate Tax Question: Nearing a Resolution?

We are constantly asked by clients about the future of estate taxes and how to plan accordingly. Unless something considerably more dramatic than what is on the horizon occurs, there will remain a great deal of merit in matching available strategies to individual client’s facts, circumstances, and objectives in order to mitigate this potentially very large tax.

Since 2001, the rates and exclusions for transfer taxes have been changing and the road beyond 2011 is still uncertain. You’ll recall that in 2001, legislation was passed to decrease the transfer tax rate and increase the exclusion amount concurrently over a period of 10 years…until 2011 when all changes would be repealed.

In 2001 the exclusion for lifetime gifts and estate transfers was $675,000, with transfers above $675,000 taxed at rates of up to 55%. Now, in 2008 the transfer tax rate is 45% and the exclusion is $2 million for estates and $1 million for gifts. The exclusion amount for estate transfers is scheduled to increase to $3,500,000 next year (tax free lifetime gifts will still be limited to $1 million of the $3.5 million exclusion). In 2010, all estate transfers are scheduled to be estate tax free but only for that one year. Assuming no further legislation, the gift and estate tax rates are scheduled to be increased...and the exclusions reduced…to return to 55% over $1 million in 2011. No one really expects these 2010 or 2011 situations to actually occur; something else will go into law before that…but what?!

A recently passed Senate Budget Resolution has shed some light on the possible future of estate taxes.

Conrad Teitell (a principal in the law firm Cummings & Lockwood; an adjunct visiting professor at the University of Miami Law School and director of the Philanthropy Tax Institute) provided some insight into what the Senate Finance Committee is thinking, and its potential timeline.

Mr. Teitell noted that the just-passed Senate “Budget Resolution”, is, of course, a goal and not law — “but nevertheless significant for those who read tea leaves.” Senate Finance Committee Chairman Baucus’s amendment to the Senate Budget Resolution was the only estate tax amendment to pass; but it was approved 99-1. It would make the 2009 law permanent — a $3.5 million exclusion ($7 million per couple) with a 45% tax rate for amounts above those thresholds. Five other amendments were offered but not passed. The votes on the one successful amendment and the amendments manqués could foretell the bill that the Senate will eventually pass according to Mr. Teitell.

Here’s an excerpt from the testimony of Mr. Teitell to the Senate Finance Committee (he was questioned by Senator Grassley):

“Senator Grassley (R. Iowa)

Mr. Teitell, as you have seen from the House and Senate debate over the last few years, there is a sharp division on what our long-term estate tax policy ought to be. There is a bipartisan group who would like to, at a minimum, ensure that the estate tax does not rise above the level set in 2009. The resistance to estate tax reform resides in the Leadership of the House and Senate majorities. If the Democratic Leadership agreed that, at a minimum, the estate tax would not rise above 2009 levels, would that provide clarity to estate planners like yourself? That is, clarity for the period between now and the time long-term estate tax relief is enacted?

Conrad Teitell

Mr. Ranking Member: I am sure that taxpayers and their advisers would salute members of Congress who reach a compromise so certainty will reign for the foreseeable future.

With all due respect to members of both parties, the mood of the country on this issue — based on what I hear at my lectures on estate planning to professional advisers and laypeople across the country and my discussions with fellow professionals at estate-planning conferences — is that people are fed up with the Congress’s inability to resolve this issue.

The present Congress can’t, of course, by public statement or legislation, guarantee what a future Congress will do. But for now, passage before the summer recess of a revised estate-tax law with a $3.5 million exemption (the 2009 exemption and rates alluded to in your question) would cure the current planning paralysis. The planning techniques sanctioned under current law — as well as the unlimited marital and charitable deductions — should be retained.”

Due to the resounding majority Senate vote, 99-1, in favor of making the 2009 law permanent — a $3.5 million exemption ($7 million per couple) with a 45% rate, we might expect to see something close to the 2009 law in a future bill the Senate finally passes.

Additionally, in April the Committee plans yet another hearing, that will once again focus on the provisions of the current law dealing with deferral of payment of federal estate tax for small businesses, farms and ranches (IRC §6166), special use valuation for farms and ranches (IRC §2032A), reunifying the gift and estate tax exemptions (today, in 2008, the gift exclusion is only $1 million; the estate tax exclusion is $2 million), and portability of the gift, estate and generation-skipping tax exemptions (a surviving spouse could use the deceased spouse’s unused exemptions).

Mr. Teitell indicated further that given the “overarching concern … in how small businesses, farms and ranches would be treated under the proposed alternative tax systems”...by many of the high ranking Senators on the Finance Committee, “you can bet the farm, ranch and small business that their exposure to estate taxes will be further shielded.”

Still, for most of our clients, such provisions and these anticipated levels of allowance and rates will not provide much real escape from substantial transfer tax exposure.

Ken Anderson