Bill Introduced to Freeze Estate Tax at 2009 Levels and to Eliminate Discounts on Nonbusiness Assets – Part I

February 6, 2009

House Ways and Means Committee member Pomeroy (D-ND) has introduced H.R. 436, “Certain Estate Tax Relief Act of 2008,” a bill that would freeze the lifetime estate tax exemption at $3.5 million per decedent (the 2009 level) and would retain the 2009 estate tax rate ceiling at 45%. The “carryover basis” rules that would have taken effect upon the repeal of the estate tax are themselves repealed under the bill. In addition, H.R. 436 would reduce the availability of valuation discounts for gift and estate tax purposes and, through a “clawback” provision, would effectively impose a higher rate on estates over $10 million. The Association for Advanced Life Underwriting strongly supports sustainable estate tax reform which can enable clients to plan with certainty; for example, reform with an exemption level of $2.5 to $3.5 million, a top rate of 45% and a reunification of gift and estate tax exemption levels. Some of the provisions have to be closely examined for potential negative impact on clients.

The bill contains a provision that would phase out the effect of the graduated estate tax rates and unified credit on estates over $10 million. Although the bill does not address directly the generation-skipping tax exemption (currently $3.5 million), the fact that the GST exemption is tied to the estate tax exemption would also raise the GST exemption under this bill. The bill would implement an idea that discounts to the value of an entity holding “nonbusiness” assets (including most assets not used in the active conduct of a trade or business) should be eliminated for transfer (estate, gift and GST) tax purposes.

Under current law, transfer taxes are imposed on the “fair market value” of the property transferred, which is generally defined as “the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.” In the case of non-publicly traded interests, a hypothetical “willing buyer” would take into account numerous factors, including the degree of control of the business represented by the equity interest being acquired., as well as any limits on his or her ability to dispose of the interest in the future. Recognition of the existence of these factors by the courts has resulted in the allowance of often steep minority interest and marketability discounts to the value of such property. Other discounts include those applicable to transfers of partial interests in property and built-in capital gains. Next week, in Part II, we will go on to list some of the other provisions included such as Valuation Discounts.

Source: AALU Washington Report, 1/23/09


On January 27th, Governor Paterson signed new power of attorney legislation as Chapter 644 of the Laws of 2008. This law makes dramatic changes, including a new statutory short form, to be notarized, and if a principal wants to authorize gifts, a new form that must be witnessed rather than notarized. As enacted, the law has a March 1, 2009 effective date, but we are hopeful that the date will be extended to at least September 1, 2009 by separate legislation, that is, by a chapter amendment. Look for subsequent newsletters as developments warrant.