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Archive for the ‘Estate Tax’ Category

The U.S. House of Representatives passed H.R. 4154, the Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Act of 2009 on Thursday, December 3, 2009 by a margin of 225-200.  The legislation was introduced by Rep. Earl Pomeroy (D-ND) in November.  The bill would have the following affect on the current estate tax law:

  1. Maintain the current $3.5 million federal estate tax exemption amount per individual in 2010 and beyond.
  2. Set the maximum federal estate tax rate at 45%.
  3. Permanently repeal the repeal of the federal estate tax as provided under the Economic Growth and Tax Relief Reconciliation Act (“EGTRRA-2001”), including EGTRRA’s modified cost basis provisions.

The debate now moves to the U.S. Senate, where several versions of an estate tax revision have been introduced, such as the Baucus Bill (S.722) and the Lincoln-Kyle Bill (S.A. 873). 

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA-2001) made significant changes in the estate and gift taxes.  First, The Act gradually phased the exemption amount upward between 2003 and 2009 and completely repealed the estate tax for the year 2010.  Second, The Act gradually reduced the top tax rate that can be applied in computing estate tax liability from 55% to 45% by 2007.  Additionally, the current “fresh-start” carryover cost basis for inherited property under I.R.C. § 1014 would be replaced by a modified carryover basis regime in new I.R.C. § 1022.  Under this new section, property passing from a decedent will have a basis for the recipient equal to the lesser of the decedent’s basis or the value of the property at death.  EGTRRA-2001 also had the effect of significantly raising the exemption amounts and reducing the applicable tax rate, therefore removing a large percentage of what would otherwise have been taxable estates from the tax base.  Lastly, EGTRRA-2001 is set to expire due to a sunset provision after 2010, therefore returning the estate tax exemption levels to its pre-2001 amounts.  This uncertainty has left attorneys and clients in a quandary as the deadline approaches.

One issue that H.R. 4154 fails to address was that of portability.  Portability is the issue of whether to allow a surviving spouse to use a deceased spouse’s unused exemption amount.  For example, presently a married couple could pass $7 million in assets without incurring estate tax liability by utilizing each spouse’s $3.5 million exemption.  However, if the first spouse to die had only $1 million in assets and the survivor had the other $6 million titled or held in their name, the first spouse could only have used $1 million of their exemption.  A portability provision in the estate tax law would allow the unused exemption amount of the first spouse to die to pass to the surviving spouse, allowing a married couple to maximize the use of their available exemptions, regardless of how their assets are titled and held.  It is important to note that while H.R. 4154 does not include a portability provision, the  Baucus bill currently contains such a provision.

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