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Estate Tax Repeal?

Changes to estate tax law since 2001 have gradually reduced the rate and increased the exemption until 2010. Now, it’s unclear whether the estate tax will be repealed in 2010.

By Andrew M. Katzenstein
The tax planning community has patiently watched changes unfold to estate tax law since 2001 that have gradually reduced the rate and increased the exemption until 2010, at which time the estate tax would not apply. In 2011, the estate tax is scheduled to “come back” at old rates and with the old exemptions. With a little more than nine months left in 2009, we wonder whether we’ll get to repeal in 2010 or whether the repeal would be made permanent for years after 2010.

As it stands, if nothing is done, the estate tax is repealed for 2010. The gift tax will remain (there will be a $1 million per person lifetime exemption from the gift tax, and the annual gift tax exclusion will still be available to make transfers). For income tax purposes, the “basis step-up” at death will be limited in 2010.

To change this, Congress must pass a new law before the end of 2009 so that the estate tax is not repealed in 2010. While there is some talk about making this happen, no one knows what action Congress will take.

News reports indicate President Obama intends to avoid repeal in 2010. Instead, the 2009 $3.5 million exemption from estate tax and a 45 percent estate tax rate will become the law for 2010 and thereafter. Further, these reports suggest that there will be no inflation adjustment for the $3.5 million exemption.

Indeed, a number of estate tax bills have already been introduced in 2009. In the House of Representatives, four bills to permanently repeal the estate tax were introduced by Republicans, while Democrats introduced two bills to make the $3.5 million exemption and 45 percent rate permanent after 2009. In the Senate, Republicans introduced one bill to permanently repeal the tax. No action has yet taken place on any of these proposed bills.

The Obama camp has not introduced any bills on the subject, but during his presidential campaign, he stated that his intention was to avoid appeal in 2010, lock the exemption in at $3.5 million and lock rates in at 45 percent.

The Democrats have the votes to eliminate repeal in the House and have a significant majority in the Senate—but not a filibuster-proof majority. To filibuster, however, would be a two-edged sword for Republicans. To accomplish repeal for one year (2010) using a filibuster, Republicans would need to block any action on the estate tax—which means that in 2011 the tax would come back at higher rates (55 percent) and with a lower exemption ($1 million). Are Republicans willing to risk a one-year repeal for an unlimited future of higher rates and lower exemptions?

A compromise for Republicans would seem to give up the 2010 repeal for the locked-in higher exemption and lower rates going forward. Democrats are lining up behind that approach. In a “post-partisan” Washington—if there is such a place—this seems the logical result. The question is: has Congress arrived in post-partisan Washington? We shall see.

Congress has a little more than nine months to act, or the estate tax will be repealed for 2010 as of Jan. 1, 2010, meaning for decedent’s dying on or after that date and before Jan. 1, 2011, no estate tax will be imposed on their assets.

Estate Tax FAQs (IRC secs. 2000+)
What is included in the estate? The gross estate of the decedent consists of an accounting of everything your client owns or has certain interests in
at the date of death (Refer to Form 706). The fair market value of these items is used, not necessarily what was paid for them or what their values were when acquired. The gross estate will likely include non-probate and probate property. What is excluded from the estate? Generally, the gross estate does not include property owned solely by the decedent’s spouse or other individuals. Lifetime gifts that are complete (no powers or other control over the gifts are retained) are not included in the gross estate (but taxable gifts are used in the computation of the estate tax). Life estates given to the decedent by others in which the decedent has no further control or power at the date of death are not included.

What deductions are available to reduce the estate tax?

One of the primary deductions for married decedents is the marital deduction. All property that is included in the gross estate and passes to the surviving spouse is eligible for the marital deduction. The property must pass “outright.” In some cases, certain life estates also qualify for the marital deduction.
Charitable Deduction: If the decedent leaves property to a qualifying charity, it is deductible from the gross estate.
Mortgages and debt.
Losses during estate administration.
Funeral, legal, executor/trustee, accounting and other administrative expenses of the estate.

Tips Regardless of 2010 Outcome
Here are some estate planning tactics that work well whether or not the estate tax is changed before 2010. The most important point is to make sure that all clients are aware of the need to review their estate plans in light of either current laws or potential changes. Consider the following:

Make gifts of real estate while values are low.
Make gifts of securities or other assets while values are low.
Make loans to family members while the federal applicable federal rate is low.
Sell assets to family members
on an installment basis in view of low values and low interfamily interest rates.
Consider a Charitable Lead Trust.
Consider grantor retained annuity trusts (GRATs), sales to intentionally defective grantor trusts (IDGTs) or other interest sensitive planning techniques.
Revise your trust funding formula in view of changing exemptions and cash flow needs.
Update beneficiary designations for insurance, retirement plans and annuities.

Information provided by CalCPA’s Estate Planning Committee.
Andrew M. Katzenstein is a partner at Proskauer Rose LLP in Los Angeles.