ESTATE TAX UPDATE

October 16, 2009

There has been much discussion about the temporary repeal and reinstatement of the federal estate tax. Here is a brief summary of some of the current proposals.

Right now, there are three major bills in Congress:

Senate Bill 722
• Makes permanent the 2009 $3.5 million exemption and top 45% tax rate
• Reunifies the estate and gift tax exemption (the gift tax exemption is $1 million in 2009)
• Indexes the exemption for inflation
• Allows for exemption portability (i.e., allows the transfer of a decedent’s unused exemption to his or her surviving spouse)

House Bill 2031
• Makes permanent the exemption level at $2 million
• Establishes top tax rates of 45% for estates valued between $2 million and $5 million to $10 million, and 55% for estates valued over $10 million
• Reunifies the estate and gift tax exemption
• Indexes the exemption for inflation
• Allows for exemption portability
• Restores the state death tax credit

House Bill 436
• Makes permanent the 2009 $3.5 million exemption and top 45% tax rate
• Reunifies the estate and gift tax exemption
• Limits the valuation discount for family limited partnerships (FLPs)
• Provides strict valuation rules for the transfer of non-business assets

And, the Congressional Budget Office has modeled these four options for Congress:

Option 1
• Makes permanent the exemption level at $5 million
• Establishes the tax rate to equal the top rate on capital gains (currently 15% in 2010 and 20% thereafter)
• Indexes the exemption for inflation
• Disallows the deduction for state death taxes

Option 2
• Makes the same changes as Option 1, but a two-tiered rate would be used – the first $25 million of taxable assets would be subject to the top capital gains rate, then taxable transfers above $25 million would be taxed at 30% (and the $25 million threshold would be indexed for inflation)

Option 3
• Makes permanent the 2009 $3.5 million exemption and top 45% tax rate

Option 4
• Repeals the estate tax in 2010
• Retain the $1 million gift tax exemption
• Institutes a carryover basis regime state

We’ll continue to pass along timely, relevant information as it materializes.

Source: Forefield, 10/15/09.