Tax, Trusts & Estates Law Monitor : Estate Planning Lawyer & Attorney : Cole Schotz Meisel Forman & Leonard Law Firm : NJ, Mid-Atlantic Gift Tax & Trust Issues

It is official. President Obama signed into law Friday the “Tax Relief, Unemployment Insurance Authorization, and Job Creation Act of 2010.” The law removes (for now) a good deal of the uncertainty that existed with the repeal of the estate tax in 2010 and a return in 2011 to the estate and gift tax exemptions and rates of 2001.

The major gift, estate and generation-skipping tax provisions of the Act are as follows:

• Beginning January 1, 2011, the estate, gift and generation-skipping tax exemption is $5 million per taxpayer ($10 million per couple) and the tax rate is 35% (beginning in 2010).
• The estate tax exemption for a deceased spouse is portable, meaning the surviving spouse can use the unused estate tax exemption of the “last deceased spouse.”
• The lifetime gift tax exemption increases from $1 million to $5 million, meaning the gift tax exemption is unified with the estate tax exemption. This presents many planning opportunities for taxpayers to transfer significantly more wealth during their lifetimes without paying gift tax.
• Two year GRATs are still permitted.
• For decedents dying in 2010, executors have a choice. The default rule is that the estate tax regime applies at a 35% rate and a $5 million estate tax exemption. The executor can opt out of the estate tax regime and opt for the carry-over basis regime. The due date for the estate tax return and/or the return reporting carry-over basis is now nine months following date of the enactment of the Act (September 17, 2011), and not nine months from the date of death.
• The rates and exemptions are temporary and apply only in 2011 and 2012, at which time the law will need to be revisited again.
   

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Repeal of the federal estate tax in 2010 – once unthinkable – now appears likely. While the House of Representatives passed a permanent extension of the estate tax in early December, the Senate has been unable to pass a temporary or permanent extension, or anything else related to the estate tax, as Congress rushes toward its holiday recess. It now appears likely that nothing will be passed prior to the end of the year and we will begin 2010 with no federal estate tax.

Congressional leaders have stated that they will resume efforts to pass legislation as soon as Congress returns, so repeal, if it happens, may be short-lived. Some Republicans have stated that they feel they will have better leverage to negotiate if the estate tax is actually repealed. Democrats have stated they would hope to restore the current tax and make it retroactive to January 1.

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Although Congress has been focused on health care and two wars, virtually everyone agrees that there will be estate tax legislation in the final 30 days of 2009, and the repeal scheduled for January 1, 2010, is not going to happen.

House Majority Leader Steny Hoyer is expected to bring a bill to the floor this week that would make permanent the 2009 estate tax levels ($3.5 million exemption, 45% rate), though a one-year patch also remains a possibility. This bill does not include other features like reunification, portability and indexing for inflation, due to concerns that these features increase the “cost” of the bill and make it less likely to pass given the limited time for consideration.

The Senate will take up the legislation toward the middle of December. Several lobbying groups feel that there is greater support in the Senate for reunification, portability and indexing.

If some or all of these features are included in the Senate bill, but not the House bill, they will get resolved in conference. Lobbying groups predict it will be down to the wire, with any agreement occurring between December 23 and December 30.
 

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The imminent federal estate tax legislation is on everyone’s minds, and it appears increasingly likely that the legislation this year will be a one-year patch, or a one-year freeze of the 2009 rules (a 45% estate tax rate and a $3.5 million exemption).

According to the Association for Advanced Life Underwriting (“AALU”), an important trade and public affairs group, permanent reform is less likely this year and enactment of a one-year patch is the most likely outcome.

Some of the important considerations in the estate tax legislation debate include:

• Cost. According to congressional analysis, permanent enactment of the 45% estate tax rate and a $3.5 million exemption will “cost” the government $233 billion over 11 years (that is, compared to the 2001 rules which could return in 2011). Given large federal deficits, lawmakers may focus on the estate tax as one area to recover revenues lost through AMT reform, the R&D credit or other law changes.
• Reunification, portability and indexing. Some of the more thought-provoking issues in the estate tax debate include (1) reunification of the gift and estate tax exemptions, (2) the portability of unused exemption amounts between spouses, and (3) indexing the exemption amounts to inflation.
• Limitations on lack of control and lack of marketability discounts. Restrictions on the use of discounts are included in the “Pomeroy” bill, currently the leading bill in the House. It is of course unknown at this time whether this provision will be enacted.

The AALU predicts that the Senate debate on the estate tax will extend to mid or late December. We will continue to post updates as new issues arise regarding this legislation.
 

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