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House passes and Senate considers estate tax relief

After passing a total repeal bill five times in the last five years, the U.S House of Representatives recently passed a compromise measure, the “Permanent Estate Tax Relief Act of 2006” (H.R. 5638) by a 269-156 vote. The Act’s provisions would take effect in 2010 and improve, among other things, the estate and gift tax rates and exemption amount. While some observers expect a Senate vote soon, others question whether it will even happen this session. Just as uncertain is whether there are enough Senate votes for a bill to pass. As it stands now, it is reported that Senate Republicans are one or two votes shy of the 60 votes necessary for Senate passage.

Many Senate Democrats are in no hurry to compromise. Instead, they are hoping for electoral gains in the coming election, which would put them in a better negotiating position. Further, some Senate Republicans have vowed not to vote for any measure with a top tax rate of over 30%. The Act would impose a top estate and gift tax rate equal to double the maximum capital gain rate, meaning the top estate and gift tax rate would be 30% currently. However, with the maximum capital gain tax rate set to go back to 20% in 2011, the top estate and gift tax rate would correspondingly jump to 40%.

If the Act does pass, it would modify many of the estate and gift tax provisions contained in the Economic Growth and Tax Reconciliation Act of 2001 (EGTRA). These new provisions would include the previously mentioned top estate and gift tax rate of twice the capital gains rate (currently 30%) for estates over $25 million and a rate equal to the capital gains rate (currently 15%) for those above $5 million and under $25 million. These rates would apply for years 2010 and beyond. As it stands now under EGTRA, no estate tax will be due in 2010 regardless of estate size. However, after 2010, estate and gift tax rates return to the pre-EGTRA top rate of 55% under current law.

Another provision of the Act would grant a permanent exemption of $5 million for gift, estate and generation-skipping tax (GST) purposes. Current law grants a $1 million exemption for gift tax purposes, and a $2 million exemption for estate and GST purposes (increasing to $3.5 million in 2009 and set to return to the pre-EGTRA amount of $1 million after 2010). Moreover, under the Act, a surviving spouse could elect to use any of the deceased spouse’s unused $5 million exemption. Current law only allows each spouse to use his or her own exemption amount.

Additionally, the Act would re-unify the estate, gift, and GST tax. As such, a common exemption amount and rate schedule would apply to the cumulative taxable transfers an individual makes during life and at death. Another provision of the Act would maintain the “stepped-up” basis for property acquired from a decedent, as opposed to the modified carryover basis that takes effect in 2010 under EGTRA. The Act would permanently repeal both the state death tax credit and the deduction for state death taxes. In addition, the Act would retain EGTRA provisions now in effect concerning the treatment of certain transfers in trust, qualified conservation easements, installment payment of estate taxes, and various technical aspects of the GST.

Overall, the provisions of the Act would lower the tax burden for years after 2010 on property transfers, whether by lifetime gift or at death. At the very least, if the Act does pass, taxpayers would have some certainty when preparing estate plans. While the Act’s fate in the Senate is hard to predict at this time, the Act represents a middle ground to what both Republicans and Democrats have been pushing for, and as such stands a better chance of Senate passage than prior bills.

  • Partner

    John is a partner in the firm's Estate Planning Department. He focuses his practice on estates, trusts, family business and disability planning, and the administration of estates and trusts. John also has an active health law ...



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