As most of you know (and as we explained in Estate Planning in 2010), this year is tricky for wealth advisors. The Federal estate tax, which lapsed in 2010, is set to come back in on January 1, 2011, with a tax of 55 percent on estates worth more than $1 million. The 2010 modified carryover basis regime—which limited the amount of appreciation that could escape taxation at death—will revert to a full stepped-up basis system in 2011.
If the changes scheduled under current law aren’t confusing enough, it is widely expected that Congress will act before 2011 to “fix” the current estate tax dilemma (some of us who expected the same thing for 2010 aren’t holding our breath). In the last few months, proposals have been introduced that would provide a permanent estate tax fix. While each of these proposals would be preferable to the current law, there are some significant differences.
Sanders Proposal: The Responsible Estate Tax Act
In June, Senator Bernie Sanders (I-Vt.) introduced the Responsible Estate Tax Act. The bill was co-sponsored by Tom Hardin (D-Iowa), Sheldon Whitehouse (D-R.I.), and Sherrod Brown (D-Ohio). It would raise the exemption amount to $3.5 million ($7 million for couples). Estates valued between $3.5 million and $10 million would be taxed at 45 percent, estates worth $10 to $50 million would be taxed at 50 percent, and estates over $50 million would be taxed at 55 percent.
The Sanders proposal would also include a billionaire’s surtax of 10 percent. It would apply to estates exceeding $500 million ($1 billion for couples). While this tax has caused some controversy, it would affect an insubstantial portion of the population (Forbes magazine estimates that there are only 403 billionaires in the United States).
Senator Sanders’ proposal also adopts recommendations set forth in President Obama’s 2011 budget, including a ten-year cap on grantor retained annuity trusts and curbing valuation discount techniques. The bill would allow farmers to reduce the value of farmland by $3 million (currently capped at $1 million) for estate tax purposes. It would also increase the maximum exclusion for conservation easements to $2 million.
Sanders proposal would make the changes retroactive to January 1, 2010, a move that would almost certainly face constitutional challenges.
Lincoln-Kyl Proposal: Amending the Small Business Lending Bill
On July 13, Senators Blanch Lincoln (D-Ark.) and Jon Kyl (R-Arz.) introduced their version of estate tax reform. Their bill was a revamped version of their April 2009 proposal, which received broad bipartisan support.
The Lincoln-Kyl proposal would require the Senate Finance Committee to amend the Small Business Lending Bill to fix the estate tax. It would gradually drop the maximum tax rate to 35 percent and fix the exemption amount at $5 million (phased in over a 10-year term), indexed for inflation. Basis of property acquired from a decedent would be stepped up to fair market value at death.
The Lincoln-Kyl bill allows the estates of taxpayers who die in 2010 to choose which tax regime to apply. Taxpayers can choose to either apply the 2010 tax regime (no estate tax but modified carryover basis) or file under the provisions of the new bill. This option would allow taxpayers with modest estates but highly appreciated assets to take advantage of full stepped-up basis. Taxpayers without significant appreciation in their assets or those with more substantial estates could apply the 2010 law to escape taxation.
The Lincoln-Kyl bill is more taxpayer-friendly than the versions favored by most Democrats, but it is likely to garner support from Republicans and moderate Democrats.
About Jeramie Fortenberry
