House Of Representatives Passes Permanent Estate Tax Act, But The Fate Of The Bill In The Senate Is Uncertain

On December 3, 2009, the House of Representatives passed the “Permanent Estate Tax Relief for Families, Farmers, and Small Business Act of 2009” (H.R.4154). If adopted by the Senate, the bill will freeze the estate and gift tax status quo as of this year.

The House Bill eliminates the one-year repeal of the federal estate tax and the carryover basis regime for decedents dying after December 31, 2009, and before January 1, 2011, put in place by the Economic Growth and Tax Relief Reconciliation Act of 2009 (EGTRRA). In its place, the House Bill retains the federal estate tax at its current 2009 levels on a permanent basis beginning in 2010. Accordingly, the maximum estate tax rate is permanently set at 45% and the estate tax exclusion amount is permanently set at $3.5 million ($7 million for married couples). Unfortunately, the House Bill does not provide for “portability,” which would allow a surviving spouse to elect to take advantage of the unused portion of the estate tax exclusion of his or her predeceased spouse, thereby providing the surviving spouse with a larger exclusion amount.

Further, under the tax regime for decedents dying on or after January 1, 2010, and on or before December 31, 2010, EGTRRA would have repealed the stepped-up basis rules and replaced them with a modified carryover basis regime. Generally, the tax basis of property acquired from a decedent would have been carried over from the decedent. The House Bill leaves in place the traditional stepped-up basis regime for all assets included in the gross estate. Under the stepped-up basis rules, the income tax basis of property acquired from a decedent at death is stepped up (or down) to its value as of the date of the decedent’s death.

Gift Tax

Under the House Bill, the applicable exclusion amount for gift tax purposes remains $1 million for 2010 and later years. The gift tax is applicable to the extent the value of the gift or gifts given to any person during a calendar year exceeds the statutorily provided annual exclusion amount. The annual gift tax exclusion amount, which is inflation indexed, is $13,000 for 2009 and 2010. To the extent that the value of the gift exceeds the annual exclusion amount, it is subject to gift tax. The estate tax exclusion continues to be “unified” with the gift tax in that any portion of the lifetime gift tax exclusion that is used reduces the $3.5 million exclusion amount available against the estate tax.

Generation-Skipping Transfer Tax

The House Bill makes permanent the 2009 treatment of the GST tax. The GST tax exemption is equal to the applicable exclusion amount for estate tax purposes ($3.5 million) and the GST tax rate is determined using the highest estate and gift tax rate (45%).

EGTRRA Provisions Not Repealed

The House Bill does not repeal all of the EGTRRA estate and gift tax provisions. In addition to the $1 million lifetime gift tax exclusion amount already mentioned, the House Bill retains EGTRRA’s:

·    Repeal of the state death tax credit
·    Repeal of the qualified family-owned business deduction
·    Modification to qualified conservation easements
·    Modification to the estate tax installment payment rules; and
·    Modification of GST tax rules.

The fate of the House bill in the Senate is uncertain, although many observers believe some kind of estate tax “fix” is imperative this year. Without new legislation, 2010 will bring the complete abolition of the estate tax under EGTRRA for one year, as well as the adoption of a new ‘modified carryover basis’ system for valuing inherited assets which would increase the tax burden for beneficiaries and would be very difficult for executors to administer.

Source: The Earth Times