How Sensible and Relief-Oriented ARE the Federal Estate Tax Legislative Proposals?

While attending a meeting of the American Academy of Estate Planning Attorneys, of which I am a Fellow and long-time member, one of the presenters discussed the status of legislative proposals concerning estate tax. In a nutshell….

Today the estate tax exclusion is $3.5 million. As written, current law says the estate tax will be repealed in 2010 and revert back to a $1 million exemption in 2011. With 58 seats in the Senate (plus two Independents), a clear majority of 255 in the House and their party occupying the White House, no one in their right mind thinks the Democrats are going to let this stand. They are on a desperate search for money…and it’s about to get worse. The estate tax will not be going away. However, the three major reform bills are stalled pending the passage of health care legislation. Once complete, expect them to turn their attention to a few tax bills, including these.

Before I outline these, you’ll have to pay careful attention to the irony, even hypocrisy, of the names attached to these bills.

First, we have the Certain Estate Tax Relief Act of 2009 (“CETRA”). It makes the $3.5 million exclusion permanent, reunifies the gift and estate tax and applies a 45% rate of all estates in excess of the exclusion.

Next comes the Taxpayer Certainty and Relief Act of 2009 (“TCRA”). Certainty and relief in a tax bill? Again, the exclusion remains at $3.5 million, this time indexed for inflation after 2011. That’s getting somewhere, because I’m guessing we might have a little inflation somewhere down the road. This bill also imposes a 45% rate on amounts in excess of the exclusion. It increases the Special Use valuation from $1 million to $3.5 million, introduces the concept of “marital deduction portability” and includes middle income tax cuts.

Then we have the Sensible Estate Tax Act of 2009 (“SETA”). Again, I’m shaking my head and laughing out loud at these names. This bill comes with a lower $2 million exclusion, also reunifies the gift and estate tax laws and taxes the excess over the exclusion at rates beginning at 45% and capping out at 55%, depending on the size of the estate.

In addition to these proposals there are others that will seriously impact wealth preservation strategies. There will be new restrictions on the use of short-term Grantor Retained Annuity Trusts and either elimination or severe restriction in the use of entity discounts. The latter change will alter our thinking on the use of family limited partnerships and limited liability companies in our planning.

I expect patchwork legislation at the end of 2009 that will extend the $3.5 million exclusion for a year or two until they can get back to it…only after ending a couple of wars, running the auto and banking industry, pulling the Dollar from the brink, telling people how much they can make, shutting down a few settlements, reinstating a Honduran leader legally voted from office, taking over 16% of the economy, fending off more coming Tea Party anger because of all the other new tax increases and cleaning up a few trillion in new debt. Routine day at the office. Glad it’s not mine.

If you would like more information about these proposals or would like to schedule a complimentary consultation to see how they will impact your planning let us know by emailing me at info@parmanlaw.com.