Archive for the 'Estate Planning' Category

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Same Sex Marriage, The Estate Tax & The [Possible] Death of DOMA

“There is nothing more powerful than an idea whose time has come.” – Victor Hugo

I posted last week about Hawaii having approved civil unions for same sex and couples (and for the rest of us breeders too).  Then the Obama administration one-upped that news by deciding to stop defending DOMA in the federal courts which lead directly to a number of posts and articles out there on the blog-o-nets about how a possible repeal of DOMA may have estate tax implications for same-sex couples.  It gets a little technical but my man Joel Shoenmeyer does a great job of getting us started in his post, DOMA, Same-Sex Marriage, and the Estate Tax.  Joel writes:

Federal estate tax law allows for a “marital deduction” for gifts made to a spouse at death, but the deduction is “equal to the value of any interest in property which passes or has passed from the decedent to his surviving spouse.” And, because of DOMA, same-sex married couples were not deemed to have a surviving spouse. This created a larger burden on same-sex married couples with estates subject to tax.

Some commentators have called this additional burden a “Gay Tax.”  FamilyFairness.org writes here:

The Williams Institute of UCLA School of Law has released a study [pdf] that shows that same-sex couples are assessed an average of $3.3 million more in taxes upon the death of their partner than a similarly situated opposite-sex couple. Because estate taxes are set federally, the Defense of Marriage Act prohibits even married same-sex couples from taking advantage of the marital deduction.

The Edith Windsor case, detailed here (and in this NYT article),  illustrates the point:

On November 9, 2010, Ms. Windsor, who shared her life with her late spouse, Thea Spyer, filed a lawsuit against the federal government for refusing to recognize their marriage. In the lawsuit, Ms. Windsor alleged that DOMA violated the equal protection clause of the U.S. Constitution because it recognized marriages of heterosexual couples, but not those of same-sex couples, despite the fact that New York State treats all marriages the same. Edie and Thea were married in Canada in 2007, and were considered married by their home state of New York.
When Thea died in 2009, Edie was the sole beneficiary of Thea’s estate. Because they were married, Thea’s estate normally would have passed to her spouse Edie without any tax. But because the federal government refuses to recognize otherwise valid marriages of same-sex couples due to DOMA, Thea’s estate had to pay more than $350,000 in federal estate tax. Earlier in 2010, Edie requested a full refund from the government. The IRS rejected that claim, citing DOMA.
These cases are going to come like a flood into the courts.  This NYT article describes how,  back in July of 2008, Judge Joseph L. Tauro of United States District Court in Boston sided with the Plaintiffs and ruled that DOMA “compels Massachusetts to discriminate against its own citizens in order to receive federal money for certain programs.” The other case [pdf], brought by Gay and Lesbian Advocates and Defenders, focused more narrowly on equal protection as applied to a handful of federal benefits. In that case, Judge Tauro again sided with Plaintiffs in ruling that DOMA violated the equal protection clause of the Constitution by denying benefits to one class of married couples — gay men and lesbians — but not others.
DOMA feels like its on its way out folks.  1996 was a long time ago and, though opinions on gay marriage have changed dramatically since then, the real force of change here looks to be the writing of unfair checks to Uncle Sam.  The insecurity over the future of the federal estate tax and a potentially lower exemption can only mean that we will see more of these cases.  And thus, another test of Mr. Hugo’s maxim may not be too far away…

Hawaii Approves Civil Unions

Add Hawaii to the list of states that now allow Civil Unions for all of its citizens:

On Wednesday, Hawaii state legislators approved civil unions for gay and lesbian couples, and Governor Neil Abercrombie vowed to sign it into law. It was approved with an 18-5 vote. The bill allows all couples to enter into a civil union — a legal status with all the rights, benefits, protections, and responsibilities as traditional marriage. A similar bill was passed last year, but then vetoed by then-Governor Linda Lingle.
“I have always believed that civil unions respect our diversity, protect people’s privacy, and reinforce our core values of equality and aloha,” Abercrombie said in a statement. “For me this bill represents equal rights for all the people of Hawaii.”

Everything Old Is New Again – The Effect of Portability Clauses on Bypass Trusts

I was worried that after the passage of the last tax compromise that estate planners wouldn’t have anything to argue over – silly me.

There is an ongoing debate about whether or not, in light of exemption portability, bypass trusts should still be used.  On the one side are proponents (among whom I count myself) who say they should still be used because portability isn’t automatic – executors must file estate tax returns to receive the benefit, portability doesn’t apply to the GST tax, portability may leave us in 2013, and leaving your assets outright to your spouse provides no asset protection.  On the other side there are those who think such bypass trusts are not necessary any more because portability is here to stay (which seems awfully speculative to me), and having a bypass trust could be inconvenient for your spouse if funding the trust leaves nothing outside the trust.

These lawyers are now promoting a tool they used to belittle: disclaimer trusts. You leave everything outright to your spouse, giving your spouse the option to disclaim the inheritance into a bypass trust. This allows your spouse to review finances, federal estate taxes, and state estate taxes before making a decision. However, disclaimers can be tricky, and you have to really trust your spouse to disclaim the property when appropriate.
“Now the new game in estate planning is an old-fashioned form of trust—between spouses.”

The above quote is from the Prolific Professor Beyer who writes about the topic in his post here which links us to this story in Forbes.  Disclaimers can be tricky things though so be sure consult a qualified estate planning attorney in your area about what’s right for you.

A disclaimer trust differs from your regular bypass trust primarily  in that you leave everything to your spouse outright but give her the right to disclaim (turn down) all or part of the inheritance which then passes into a bypass trust.  Giving her the option to do so after your death allows her (I’m presuming the husband died first because statistically we do)  to make an informed decision based on her finances at that time and the latest federal and state estate tax laws then applicable.  The danger here is whether that informed decision can be made in the 9 months after your death, which is the time the surviving spouse has to make a qualified disclaimer, that the disclaimer is done right and that you trust your spouse to make the right decision…  Hopefully that last concern is your least.

Again, this stuff isn’t easy so:

Step 1:  Put down the pencil.

Step 2:  Call someone who knows what they’re doing.

Step 3:  What’s wrong with you?!

Your kids will thank you.

Civil Unions in Illinois – Its Official

Yesterday, Monday, January 31st, Governor Quinn signed a bill legalizing civil unions for gay and lesbian couples in Illinois.  Though the state continues to define marriage as between a man a woman this bill will, according to this story in the Sun Times, provide over 650 spousal benefits and protections.

If you enter a civil union, you can now visit your loved one in the hospital to make medical decisions and not be turned away. You can take time off to care for your partner and not lose your job,” Attorney General Lisa Madigan said.

A nice primer on Illinois Civil Unions is available here at 10,000 Couples, which points out that although “civil unions are intended to give same-sex couples the same rights as heterosexual couples, you don’t have to be a same-sex couple in order to enter into a civil union.”

Thanks to Joel Shoenmeyer for getting the word out via his Death & Taxes Blog.  (If you don’t read Joel’s blog you really should.  He’s very focused on Illinois law and always succeeds at being both funny and informative.)

Opinions Differ Widely On Effect Of New Estate Tax Law

So now that we know what the numbers are in the long awaited tax compromise, its time to track whose happy and whose sad…  And as with most things legislativley related, its not a clear answer as it depends not only on what numbers you look at but how you look at them.

In the one corner we have the New York Times and their story, “Estate Tax Will Return Next Year, but Few Will Pay It.”

Almost no one will have to worry about paying the estate tax under the tax legislation just approved by Congress.

That sums up their persepective pretty well, but they do go on:

By one estimate, from Alan Rothschild, the chairman of the American Bar Association’s real property, trust and estate law section, less than one-half of 1 percent of people who die in 2011 will be hit by the estate tax. In contrast, 10.5 percent paid the estate tax in 1977.

And even for the very few who will be subject to the tax, the increase in the gift tax exemption will allow them to give their heirs tens of millions of dollars before the estate tax even comes into play.

So there’s some real numbers there right?  Hard facts, empirically verifiable data, the stuff good conclusions are based on right?  As it turns out though, the numbers are not so clear and it really is a matter of perspective:

In the other corner is a piece published today by Hans Sarji who writes Estate of Confusion called, “Report Finds That 65,000 Small Businesses And Farms Will Be Exposed To Estate Tax In 2011.” ‘But wait’, you say.  ’That’s a lot of small businesses and farms!’  So “less than one half of one percent” is a pretty big number then?

On December 30, 2010, the American Family Business Foundation (AFBF) published a report, by Antony Davis (Economist, Duquesne University, Mercatus Center): Cost of Compromise: Impact of the 2011-2012 Estate Tax (PDF).
[...] Here are the report’s key findings:
  • Up to 67 percent of estates susceptible to paying the estate tax will include farm and small business assets;
  • Up to 22,000 farms, 14,000 real estate partnerships, and 29,000 privately-held corporations will be susceptible to the tax in 2011;
  • 170,000 total households will be susceptible to estate taxes in 2011;
  • 8,500 households will owe estate taxes in 2011; and
  • By 2048 (when today’s 20-year-olds reach retirement), half of U.S. households are projected to have sufficient assets to trigger the estate tax.

Mr. Davis concludes his report by arguing for the termination of the estate tax, so if the above wasn’t clear enough we now know for certain how he feels about this issue.

So, yeah, its tricky…   Less than one half of one percent is a small percentage but when applied to a population of 308 million you can still get some pretty big and - if you ken to Mr. Davis’ opinion – onerous numbers.

Obama Signs 2010 Tax Relief Act – What Do Trust & Estate Bloggers Talk About Now?!

My man Greg posted a very complete summary here on his blog which I have generously re-posted below:

HIGHLIGHTS

Two-year extension of all current tax rates through 2012

  • Rates remain 10, 25, 28, 33, and 35 percent
  • 2-year extension of reduced 0 or 15 percent rate for capital gains & dividends
  • 2-year continued repeal of Personal Exemption Phase-out (PEP) & itemized deduction limitation (Pease)

Temporary modification of Estate, Gift and Generation-Skipping Transfer Tax for 2010, 2011, 2012

  • Reunification of estate and gift taxes
  • 35% top rate and $5 million exemption for estate, gift and GST
  • Alternatively, taxpayer may choose modified carryover basis for 2010
  • Unused exemption may be transferred to spouse
  • Exemption amount indexed for inflation in 2012

AMT Patch for 2010 and 2011

  • Increases the exemption amounts for 2010 to $47,450 ($72,450 married filing jointly) and for 2011 to $48,450 ($74,450 married filing jointly).  It also allows the nonrefundable personal credits against the AMT.

Extension of “tax extenders” for 2010 and 2011, including:

  • Tax-free distributions of up to $100,000 from individual retirement plans for charitable purposes
  • Above-the-line deduction for qualified tuition and related expenses
  • Expanded Coverdell Accounts and definition of education expenses
  • American Opportunity Tax Credit for tuition expenses of up to $2,500
  • Deduction of state and local general sales taxes
  • 30-percent credit for energy-efficiency improvements to the home (IRC section 25C)
  • Exclusion of qualified small business capital gains (IRC§1202)

Temporary Employee Payroll Tax Cut

  • Provides a payroll tax holiday during 2011 of two percentage points. Employees will pay only 4.2 percent on wages and self-employed individuals will pay only 10.4 percent on self-employment income up to $106,800.

Source:  Financial Planning Association

FULL SUMMARY

Reductions in Individual Income Tax Rates through 2012

  • Income brackets remain 10, 25, 28, 33, and 35 percent
  • Capital gains and dividend rates remain at 0 or 15 percent
  • Repeal of the Personal Exemption Phase-out (PEP)
  • Repeal of the itemized deduction limitation (Pease limitation)
  • Marriage penalty relief
  • Expanded dependent care credit
  • Child Tax Credit
  • Earned income tax credit

Education Incentives Extended Through 2012

  • Expanded Coverdell accounts and definition of education expenses
  • Expanded exclusion for employer-provided educational assistance of up to $5,250
  • Expanded student loan interest deduction
  • Exclusion from income of amounts received under certain scholarship programs
  • American Opportunity Tax Credit of up to $2,500 for tuition expenses

Extension of Certain Expiring Provision for Individuals through 2011

  • Above-the-line deduction for qualified tuition and related expenses
  • Tax-free distributions of up to $100,000 from individual retirement plans for charitable purposes.  Donors may treat donations made in January 2001 as if made in 2010.
  • 30-percent credit for energy-efficiency improvements to the home (IRC section 25C)
  • Deduction of state and local general sales taxes
  • Parity for employer-provided mass transit benefits
  • Contributions of capital gain real property for conservation purposes
  • Deductibility of mortgage insurance premiums for qualified residence
  • Estate tax look-through of certain Regulated Investment Company (RIC) stock held by nonresidents for decedents dying before January 1, 2012
  • Above-the-line deduction for certain expenses of elementary and secondary school teachers

Alternative Minimum Tax (AMT) Relief

  • The legislation increases the exemption amounts for 2010 to $47,450 (individuals) and $72,450 (married filing jointly) and for 2011 to $48,450 (individuals) and $74,450 (married filing jointly).  It also allows the nonrefundable personal credits against the AMT.

Temporary Estate Tax Relief and Modification of Gift and Generation-skipping Transfer Taxes

  • Higher exemption, lower rate. The legislation sets the exemption at $5 million per person and $10 million per couple and a top tax rate of 35 percent for the estate, gift, and generation skipping transfer taxes for two years, through 2012. The exemption amount is indexed beginning in 2012. The proposal is effective January 1, 2010, but allows an election to choose no estate tax and modified carryover basis for estates arising on or after January 1, 2010 and before January 1, 2011. The proposal sets a $5 million generation-skipping transfer tax exemption and zero percent rate for the 2010 year.
  • Portability of unused exemption. Under current law, couples have to do complicated estate planning to claim their entire exemption.  The proposal allows the executor of a deceased spouse’s estate to transfer any unused exemption to the surviving spouse without such planning. The proposal is effective for estates of decedents dying after December 31, 2010.
  • Reunification of estate and gift taxes. Prior to the 2001 tax cuts, the estate and gift taxes were unified, creating a single graduated rate schedule for both. That single lifetime exemption could be used for gifts and/or bequests. The proposal reunifies the estate and gift taxes. The proposal is effective for gifts made after December 31, 2010.
  • As noted above. the look-through of RIC stock held by non-resident decedents is extended through 2011

Temporary Extension of Investment Incentives

  • Extension of bonus depreciation for taxable years 2011 and 2012
  • Small Business Expensing: increase in the maximum amount and phase-out threshold under section 179. Sets the maximum amount and phase-out threshold for taxable years 2012 at $125,000 and $500,000 respectively, indexed for inflation.  (Previously-passed legislation raised the 2010 and 2011 max amount and phase-out at $500,000 and $2,000,000 respectively.)

Extension of Certain Expiring Provisions for Businesses through 2011

  • Enhanced charitable deduction for corporate contributions of computer equipment for educational purposes
  • Enhanced charitable deduction for contributions of food inventory
  • Enhanced charitable deduction for contributions of book inventories to public schools
  • Special rule for S corporations making charitable contributions of property
  • 15-year straight-line cost recovery for qualified leasehold improvements
  • Employer wage credit for activated military reservists
  • Tax benefits for certain real estate developments
  • Extension of expensing of environmental remediation costs
  • Treatment of interest-related dividends and short term capital gain dividends of Regulated Investment Companies (RICs)
  • Work opportunity tax credit (WOTC)
  • 100% Exclusion of qualified small business capital gains held for more than 5 years (IRC§1202)
  • Research credit
  • Qualified Zone Academy bonds

Extension of Unemployment Insurance

  • The unemployment insurance proposal provides a one-year reauthorization of federal UI benefits.

Temporary Employee Payroll Tax Cut

  • The legislation creates a payroll/self-employment tax holiday during 2011 of two percentage points. The employer’s share of the payroll tax remains unchanged.  This means employees will pay only 4.2 percent on wages and self-employed individuals will pay only 10.4 percent on self-employment income up to $106,800.  The social security trust fund is made whole by transfers from the general fund.
  • How all this madness affects you with some advice from the Zucker Law Firm:

    Income Taxes

    • All income tax rates will remain the same for the next two years as they have for the previous ten.  References to the extension of Bush tax cuts means that tax rates cut in 2001 will remain in effect at least through 2012.
    • Individuals earning more than $200,000 or couples earning more than $250,000 will not pay higher tax rates.
    • The social security tax rate (referred to as a “payroll tax holiday”) will drop from 6.2% to 4.2% in 2011.  However, the Making Work Pay Credit has expired.
      • According to the Tax Policy Center, over 99% of those earners in the lowest quintile (up to $17,873 per year) will end up with less take-home pay since the social security rate drop does not save taxpayers as much as the Credit did.
      • About half of the earners in the second quintile ($17,873 to $34,896 per year) will also have less take-home pay as well.
      • About 85% of those earning more than $34,896 will see increases in take-home pay in 2011.

    Unemployment Insurance

    • The law extends unemployment insurance benefits for 13 months.  2 million people will continue to receive their benefits.
    • COMMENT:  Obama essentially bargained for the payroll tax holiday and the extension of unemployment insurance to keep most people from having to pay more taxes during this recession.

    Alternative Minimum Tax (AMT)

    • A “patch” has been re-implemented so that about 21 million people, mostly in the middle class, will not be subject to the AMT for 2010 and 2011.
    • You will most likely have the same AMT responsibility as last year.

    Estate & Gift Taxes

    • Each person’s first $5 million will be exempt from estate taxes.  Gifts up to $5 million during one’s lifetime are also exempt from gift taxes.  Above that amount, rates will be subject to a maximum 35% rate.
    • Approximately 3,600 families will be hit with the estate tax in 2011 & 2012, down from an estimated 5,500 in 2010.  Inherited amounts now receive a full step-up in basis, and 2010’s limited carryover amounts expire.
    • The estate tax rate is retroactive to January 1, 2010.  Representatives of those dying in 2010 may select between the new estate tax rate and the law in place during most of 2010 (no estate tax with capital gain limitations).
    • Any unused exemption by one deceased spouse is portable to the second spouse’s estate.  The executor of the first spouse must actively elect this option on an estate tax return, even if there is no liability owed.
    • STRATEGIES (discuss with your estate planning attorney before implementing):
      • If you have over $5 million – while the same rates apply, gifting will still be cheaper than passing assets through the estate.  Example:  You want to give $6 million to your children.  If gifted before your death, you will owe an additional $350,000 in gift tax.  If you wait until after your death, the $6.35 million will instead result in $472,500 in estate taxes.  See this forbes.com post for another example.
      • If you have between $1 million and $5 million – don’t avoid A-B trust planning despite the new higher exemption.  Remember that the new rates only apply for two years.  While it is unlikely that the 2012 Congress would allow the estate tax exemption to revert back to $1 million with a maximum 55% rate, they will certainly be looking for ways to increase revenues.  Avoiding planning could cause you a bigger hit than necessary.
      • If you have below $1 million – you probably do not need to worry too much about estate taxes at this time.  However, DO NOT ignore estate planning – topics such as insurance ownership, guardianships, digital assets, powers of attorney, etc. are still important and necessary for all adults.  If you do, we’ll have to start to put annoying ads all over billboards, radio, TV, our blogs, etc. :)

    Generation-Skipping Tax

    • Zero for the remainder of 2010.  Unified with estate and gift taxes in 2011 and 2012.  The first $5 million of gifts to grandchildren will be exempt from generation-skipping taxes, with a maximum 35% rate above that amount.
    • STRATEGIES:  A loophole exists here.  Through the end of 2010, amounts in a multigenerational generation-skipping trust can be transferred into a new trust for the benefit of the grandchildren only and will be subject to 2010’s 0% generation-skipping tax rates.  Check this forbes.com post for further details.

    Happy planning!

    House Passes The Middle Class Tax Relief Act of 2010, H.R. 4853

    Well, despite some last minute (attempted) shenanigans, President Obama has a shiny new piece of tax legislation on his desk this morning that he is expected to sign.

    In addition to continuing the “Bush Tax Cuts” for two years and exetnding long-term unemployment benefits there are some sweeping changes to the estate tax.

    Here is a summary of the changes to the estate tax, by the Senate Committee on Finance:

    • Temporary estate, gift and generation skipping transfer tax relief. The EGTRRA phased-out the estate and generation-skipping transfer taxes so that they were fully repealed in 2010, and lowered the gift tax rate to 35 percent and increased the gift tax exemption to $1 million for 2010. The proposal sets the exemption at $5 million per person and $10 million per couple and a top tax rate of 35 percent for the estate, gift, and generation skipping transfer taxes for two years, through 2012. The exemption amount is indexed beginning in 2012. The proposal is effective January 1, 2010, but allows an election to choose no estate tax and modified carryover basis for estates arising on or after January 1, 2010 and before January 1, 2011. The proposal sets a $5 million generation-skipping transfer tax exemption and zero percent rate for the 2010 year.
    • Portability of unused exemption. Under current law, couples have to do complicated estate planning to claim their entire exemption (currently $7 million for a couple). The proposal allows the executor of a deceased spouse’s estate to transfer any unused exemption to the surviving spouse without such planning. The proposal is effective for estates of decedents dying after December 31, 2010.
    • Reunification. Prior to the EGTRRA, the estate and gift taxes were unified, creating a single graduated rate schedule for both. That single lifetime exemption could be used for gifts and/or bequests. The EGTRRA decoupled these systems. The proposal reunifies the estate and gift taxes. The proposal is effective for gifts made after December 31, 2010.

    None of the lingering questions have been answered and, as this is only a two-year deal people are already talking about the chilling effect this could have on everything from planning (income tax planning, estate tax planning, etc…) to gifting.  I’m not so sure about all that but we’ll see.

    One interesting side note is the GST loophole some commentators have pointed out in the new legislation.  The ever-informed Wills, Trusts & Estates Prof Blog has a nice and succinct summary (posted here):

    The tax bill passed by Congress confirms a 0% GST tax rate for 2010 and creates an additional loophole that was unavailable when I blogged about a possible payday for trust babies.

    In addition to outright gifts qualifying for the 0% rate, money put in a trust in 2010 for the grandkids also qualifies for the 0% rate. This means that money can be declared subject to the 2010 GST tax, “prepaid” at a 0% rate, and deposited in a new trust for the grandkids’ benefit.

    Because this transfer would still be subject to the gift tax, this technique is even more beneficial if money is already in a “non-exempt” multigenerational trust and is transferred into a new trust. This money has already been subjected to the first layer of gift or estate tax, so no additional taxes would be owed.

    Not all non-exempt multigenerational trusts can cash in on this GST tax loophole. For example, the trustee must have a lot of discretion for it to work. Additionally, only 11 states (Alaska, Arizona, Delaware, Florida, Indiana, Nevada, New Hampshire, New York, North Carolina, South Dakota, and Tennessee) have decanting provisions, allowing trust property to be moved to another trust for the benefit of a beneficiary. However, out of state trusts can take advantage of Alaska’s decanting law.

    And a newcomer – to my blogroll at least – Hani Sarji is who first pointed out this news to me on his great blog, Estate of Confusion.

    Here are resources for Reid’s legislation:

    • Summary (PDF) by the Senate Committee on Finance
    • Full text (PDF) — The bill is 74 pages long. Title III (pages 8-19 of the PDF) would reform the estate tax: “Temporary Estate Tax Relief.”

    Estate Planning Malpractice – NY Court Has A Warning For Ohio Planners

    I’ve written on the issue of estate planners committing malpractice against their clients here and here on this blog before.   Its an issue of interest for Ohio attorneys  because Ohio still clings to the antiquated rule of privity to decide who has standing to sue the attorney who allegedly gave the bad advice.  Basically, requiring privity means you must have been the one in a contractual relationship with the attorney – the client.  In the estate planning context, however, this is a little complicated because if the bad advice was given during the client’s lifetime its more than probable than not that damages for the bad advice won’t accrue until the client dies.  Therefore, you’ve got no one left to sue the attorney for malpractice because the client is dead!  Kinda dumb, I know, I complain about it all the time.

    However, tn The Estate of Saul Schneider v. Victor M. Finmann, N.Y.3d 2010 N.Y, Slip Op 05281 (pdf of opinion) decided this past June 17th, the New York court held:

    the legal representative of a decedent stands in  that person’s shoes for the purpose of being able to maintain a malpractice action against the decedent’s estate planner where improper advice or negligent estate planning has resulted in a loss.

    Imputing this legal fiction on the fiduciary means a malpractice action can now be maintained.  So there you go Ohio courts!  Lets get this done.  If you don’t want to update the law (to the much preferable California rule that follows the harm and allows the party that suffered as a result of the bad advice to bring a malpractice case) then lets give this a try…  Its a little awkward but its about time in Ohio stepped up and allowed aggrieved clients to sue the attorney who rendered the poor advice.

    Thanks to Philip Bernstein of the New York Probate Litigation Blog for pointing this out to me.

    New Estate Tax Fix Introduced

    Last night, as part of the jobs bill, Senators Blanche Lincoln (D-Ark.) and Jon Kyl (R-Ariz.) introduced legislation creating a permanent fix for the estate tax.

    According to this story at TheHill.com:

    Their proposal would require Democratic leaders to amend the small-business jobs bill with a provision that sets the estate tax at 35 percent with a $5 million exemption. These amounts will be phased in over a 10-year period and also be indexed for inflation. In addition, inherited assets would be taxed at their worth upon transfer, not when the deceased purchased them.

    Fantastic!  I’ve said before that I like $5 million as the exemption and bringing the stepped up basis back is just a no-brainer.

    Quoting Senator Kyl:

    “If the Small Business Lending bill is intended to help small business create jobs, wouldn’t it make sense to provide small-business owners with the certainty that their tax rates aren’t going to skyrocket at the beginning of next year?”

    I’m not often in agreement with Republican sound-bytes, but I am wholeheartedly behind this one.

    The Responsible Estate Tax Act (RETA)

    The Responsible Estate Tax Act is the irksome name of the act introduced this morning by Senators Sanders (I-VT), Harking (D-IA) and Whitehouse (D-RI) to remedy the impending doom of 2001 when the estate tax is (re-)released like the Cracken upon an ill-prepared populace…  However, its at least something, hence my first post in some time.

    The prolific Paul Caron of the TaxProf Blog has already posted the details and linked to a number of worthy reads on this new act which I have re-posted at the bottom here.  Thanks Paul!

    In short, the act brings the estate tax back with a $3.5 million exemption with the highest rates (for most of us) at 45%.  There is a progressive rate structure that increases the highest rate for the wealthiest among us – 55% for estates over $50 million – and a billionaires surcharge.

    The Senators summarize their bill as follows:

  • Exempts the first $3.5 million of an estate from federal taxation ($7 million for couples), the same exemption that existed in 2009. Doing this would mean that 99.75% of all estates would be exempted from the federal estate tax in 2011 alone.
  • Includes a progressive rate structure so that the super wealthy pay more. Under our bill, the rate for the value of the estate above $3.5 million and below $10 million would be 45%, the same as the 2009 level. The rate on the value of estates above $10 million and below $50 million would be 50%, and the rate on the value of estates above $50 million would be 55%.
  • Includes a billionaire’s surtax of 10%. Our bill also imposes a 10% surtax on the value of an estate above $500 million ($1 billion for couples). According to Forbes Magazine, there are only 403 billionaires in the United States with a collective net worth of $1.3 trillion. Clearly, the heirs to these multi-billion fortunes should be paying a higher estate tax rate than others.
  • Closes all of the Estate and Gift Tax Loopholes requested in President Obama’s Fiscal Year 2011 budget. These loophole closers include requiring consistent valuation for transfer and income tax purposes; a modification of rules on valuation discounts; and a required 10-year minimum term for Grantor Retained Annuity Trusts (GRATS). OMB has estimated that closing these loopholes that benefit the super-wealthy, would raise at least $23.7 billion in revenue over 10 years.
  • Protects family farmers by allowing them to lower the value of their farmland by up to $3 million for estate tax purposes. Under current law, the value of farmland can be reduced up to $1 million for estate tax purposes under § 2032(a) (Special Use Valuation). Our bill increases this level to $3 million and indexes it to inflation.
  • Benefits farmers and other landowners by providing estate tax relief for conservation easements. Our bill provides tax relief to farmers and other landowners by amending estate tax rules for conservation easements through an increase in the maximum exclusion amount to $2 million and increasing the base percentage to 60%.
  • I’m happy to see any movement on this issue because of the extreme hardship that the $1 million exemption will cause my clients.  I’m not holding my breath but I will risk cautious optimism.

    Professor Caron posted the below sources in his original post and almost all are worth a read.  Warning:  I would avoid Chris Dubay’s piece at the Heritage Foundation’s website.  Putting aside that its terribly written, its more assertion than fact and does little to increase the reader’s knowledge, either of the estate tax itself – something Mr. Dubay clearly has no understanding of based on his other published pieces on the same subject - or the proposed legislation…  Its just really sophomoric work and more of the ilk of a Glenn Beck-style opinion piece than a scholarly examination of proposed legislation.

  • Forbes, Three Senators Call For Billionaire Estate Surtax, by Janet Novack
  • Going Concern, A Few Senators Would Like Billionaires to Pitch in with the Deficit Problem, by Caleb Newquist 
  • Heritage Foundation, Dangerous Death Tax Plan Offered in the Senate, by Chris Dubay
  • The Hill, Sanders Forwards Estate Tax Fix That Inflicts Pain on the Wealthy, by Jay Heflin
  • New York Post, Death Tax Compromise Favors New Yorkers, by Josh Kosman
  • Wall Street Journal, Sanders Estate-Tax Proposal Would Hit Wealthy Harder, by Laura Saunders