Will Billionaire Dan Duncan's Estate Pass Free of Federal Estate Tax?

Professor Gerry Beyer (Wills, Trusts & Estates Prof Blog) links today to Scott Martin's post, Billionaire's Heirs First to Win 2010 Estate Tax Jackpot on The Trust Advisor Blog.

Dan Duncan is the first billionaire to die during the repeal of the federal estate tax.  Prof. Beyer notes:

If Congress reinstated the death tax for 2010 and made it retroactive for the year, Dan Duncan’s estate would generate up to $4 billion for the IRS. Although this seems to be a strong incentive for Congress pass a retroactive reinstatement, The Trust Advisor Blog predicts that Duncan’s death will actually have the opposite effect.

Will Congress retroactively restore the federal estate tax for 2010?  Scott Martin proposes that the deaths of individuals leaving large estates make it less and less likely that Congress will reinstate the estate tax for 2010:

. . . probate gurus say the sheer amount of money on the table makes a retroactive tax more unlikely. Big estates mean big lawyers ready to fight to see those billions of dollars go to the deceased’s heirs, and the headaches could go on for years. 

Planning an estate under the current 2010 rules (no estate tax; modified carryover basis rules) differs significantly from planning an estate if there is an estate tax and "traditional" basis rules.  As things currently stand, I draft estate plans to work under the current 2010 rules and at the same time build in flexibility in case Congress restores the estate tax for 2010.  Many estate planners are taking the same approach.

Congress has returned from its recess -- and I have returned from my blogging break. 

I'll keep you posted.

House Passes Pomeroy Bill HR 4154

Today the House passed HR 4154 to make permanent the $3.5 million individual federal estate tax exemption and 45% federal gift and estate tax rate (and to avoid the scheduled repeal of the federal estate tax in 2010).  It appears that all Republicans and 26 Democrats voted against the bill -- I will update this information if my numbers are off.  From what I hear from others closer to Washington, the Senate won't pass the bill without significant changes.  Chances are there isn't time to do this by the end of the year.

According to an article by Arthur D. Postal today in National Underwriter Life and Health Insurance News:

Observers expect the Senate to pass a measure that will merely extend the current rate on a temporary basis. The Senate probably will deal with the issue when it works on comprehensive tax reform legislation in 2010.

Although the House acted today, the future of the federal estate tax is still anybody's guess.

House to Vote on HR 4154 Today

The Office of the House Majority Leader released today's floor schedule.  The House is voting on HR 4154 today. 

House to Vote Soon on HR 4154

Today, OMB Watch posted House Set to Vote on Pomeroy Estate Tax Bill by Gary Therkildsen

According to the article, we could see a vote on H.R. 4154 as early as tomorrow.  (Admittedly, some of us were disappointed not to see a vote today.)   The OMB Watch article summarizes and provides links to:

H.R. 4154 provides for a $3.5 million federal estate tax exemption for individuals ($7 million per couple) and sets the federal gift and estate tax rates at 45%.  Therkildsen reports that the Center on Budget and Policy Priorities finds the Pomeroy bill "more than reasonable" and Citizens for Tax Justice "concludes that H.R. 4154 is somewhere in the middle of the spectrum between good and bad tax policy."

Therkildsen also reports:

On the other side of the debate, legislators looking to further reduce or eliminate the estate tax are preparing to introduce their legislation as well. A bi-partisan bill (H.R. 3905) sponsored by Rep. Shelley Berkley (D-NV), which almost mirrors a Senate proposal introduced by Sens. Blanche Lincoln (D-AR) and Jon Kyl (R-AZ), would reduce the estate tax to a $10 million per couple exemption at a 35 percent rate.

Stay tuned!

House Could Vote Wednesday on Estate Tax Legislation

Hani Sarji, an LL.M. candidate in Tax at New York Law School, is keeping track of Congress's increased activity to do something about the federal estate tax before the end of the year on his blog  -- Future of the Federal Estate Tax.  Hani Sarji recently provided a link to a Dow Jones Newswires article by Martin Vaughan (US House To Vote On Permanent Estate Tax Bill Next Week) that reports that the House will vote on a new bill:

The U.S. House of Representatives next week will vote on legislation to extend current estate tax rates permanently, but when and what action the Senate might take on the bill remains unclear.

The House will vote next week, Wednesday at the earliest, on estate tax legislation from Rep. Earl Pomeroy (D., N.D.), according to a schedule released by House Democratic leaders.

The Pomeroy bill would make permanent a 45% rate on inherited wealth, with the first $3.5 million exempt from the tax. Without congressional action, the tax will be repealed in 2010 and return in 2011 at a 55% rate with a $1 million exemption.

The Pomeroy bill appears to be HR 4154, which is the second estate tax bill introduced by Representative Pomeroy this year.  This bill -- known as the "Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Act of 2009" -- does the following:

  • repeals the new carryover basis rules
  • retains the estate tax
  • provides for a $3.5 million exemption
  • freezes estate and gift tax rates at 45%

Check here for Hani Sarji's updated list of all the estate tax bills introduced in Congress this year.

New Bills Aim to Restore Estate Tax in 2010

On October 22nd, Rep. Berkley (D-NY) introduced H.R. 3905 to "amend the Internal Revenue Code of 1986 to repeal the 1-year termination of the estate tax, to increase the estate and gift tax unified credit, and to coordinate a reduction in the maximum rate of tax with a phaseout of the deduction for State death taxes."

  • The bill increases the federal estate tax exemption from $3,650,000 in 2010 to $5,000,000 in 2019 and thereafter.  The bill decreases the maximum tax rate from 44% in 2010 to 35% in 2019 and thereafter.

On October 15, 2009, Rep. Schrader (D-OR) introduced H.R. 3841 (pdf) "[t]o amend the Internal Revenue Code of 1986 to repeal carryover basis for decedents dying in 2009, to increase the estate tax exemption to $5,000,000, and to reduce the maximum estate and gift tax rate to 45 percent."

Estate Tax Set to Expire (Temporarily) as Congress Waits

As we enter the last quarter of 2009, the future of the federal estate tax remains uncertain. 

  • Will the estate tax be repealed for a year in 2010?  (Doubtful.) 
  • Will Congress enact major tax legislation by the end of 2009?  (Also doubtful -- more likely, we will see a one-year fix to avoid repeal in 2010.) 
  • Will the federal estate tax exemption revert to $1,000,000 in 2011 or will Congress increase the exemption, perhaps by freezing the exemption at 2009 levels as suggested by the Obama administration?  (A couple months ago I predicted a $3.5 million exemption, but I have to admit that suspense about this question is building.) 
  • Will the top tax rate be 55% or 45%?  (Probably 45% in 2010 (the one-year quick fix), but who knows about 2011!)

An article appearing in the WSJ --  Estate Tax Faces Its Own Life-and-Death Struggle -- provides a status report:

President Barack Obama and congressional Democrats are united behind an effort to block a scheduled year-end repeal of the estate tax. But prospects are blurred by divisions between the House and Senate over the contours of a restored tax, as well as Capitol Hill's focus on health care . . . .

Officially, Republicans in Congress would like to see it disappear on schedule. . . .  But very few believe that is possible. . . .

[S]harply different bills in the House and Senate could make a long-term solution elusive. With health care and routine spending bills jamming the Senate calendar, an estate-tax fight -- first on the Senate floor, then with the House -- could make passage of a bill virtually impossible this year, House and Senate aides say. Lawmakers likely would fall back on a one-year extension of the current rate and exemption and leave the fight to next year. . . .

Even [Democratic Senator Blanche Lincoln of Arkansas, who is up for re-election in a state where opposition to the estate tax is solid,] has her eyes elsewhere. 'Our complete focus is on health care,' said Ben Portis, a spokesman for the senator. 'On the estate tax, there will be a time and place.'

Thank you to Professor Paul Caron, author of the Tax Prof Blog, for posting a summary of the WSJ article earlier today.

Short-Term Fix to Estate Tax Seems More Likely

David Shulman writes today in his South Florida Estate Planning Law blog about an article from The Hill that adds to the growing speculation that Congress will enact a one-year extension of current estate tax rates and postpone a permanent fix until next year: 

A split among Democrats and a busy fall agenda is likely to have lawmakers hold off this year on debating the future of the estate tax, even though it expires at the end of the year.

Experts and aides say a more realistic scenario involves Congress passing a one-year extension and then tackling the issue as part of broader tax reform next year.

Representative Pomeroy is holding out hope that there is time to enact new estate tax legislation this year:

Rep. Earl Pomeroy (D-N.D.), a senior member of the House Ways and Means Committee, said that the House tax-writing panel should consider a long-term solution this month or in October.

Pomeroy said lawmakers should do “something meaningful with the estate tax issue for the American people and eliminate the uncertainty of the present tax code.” Pomeroy said he has been asked by Ways and Means Committee Chairman Charles Rangel (D-N.Y.) to prepare new estate tax legislation for the panel.


Estate Tax Change Is Around the Corner: A Recap of the Current Proposals

With 2010 nearing, we should see Congress act in the next few months to pass new estate tax legislation.  What changes can we expect to see?

Here is a recap of where we are:

Federal Estate Tax Exemption and Rates: 

  • Congress's concurrent budget resolution for fiscal year 2010 is based on the assumption that the federal estate tax exemption will be frozen at $3.5 million with a 45% tax rate. 
  • Members of Congress have introduced a number of House and Senate bills, ranging from repeal of the estate tax to Rep. McDermott (D-WA)'s "Sensible Estate Tax Act of 2009" (H.R. 2023), which calls for a $2 million exemption with new graduated rates of 45%, 50% and 55%. 
  • The Treasury Department's "Greenbook," (pdf) which explains the Obama Administration's fiscal year 2010 revenue proposals, states on p. 125 of the Appendix:  "Estate and gift taxes are assumed to be extended at parameters in effect for calendar year 2009 (a top rate of 45 percent and an exemption amount of $3.5 million)."
  • I believe that the most likely outcome is a $3.5 million exemption at a 45% rate -- but we will have to wait and see what legislation Congress actually passes.


  • Members of the House and Senate have introduced bills (H.R. 2023 and S. 722) calling for portability -- i.e., the transfer of a deceased spouse's unused unified credit to the surviving spouse
  • The Greenbook does not mention portability
  • Policymakers have discussed portability for years -- will Congress makes portability a reality?  It's hard to predict what will happen. 

Other Greenbook Proposals

The Greenbook contains three proposed changes to the estate and gift tax laws starting on page 119:

  • Require Consistency in Value for Transfer and Income Tax Purposes
  • Modify Rules on Valuation Discounts
  • Require Minimum Term for Grantor Retained Annuity Trusts (GRATs)

Ronald D. Aucutt discusses these proposals in Capital Letter No. 17 published on the ACTEC website.  The article provides in-depth analysis of the proposals, and I recommend reading it in its entirety.  Below, I have excerpted parts of Aucutt's discussion:

Require Consistency in Value for Transfer and Income Tax Purposes:

. . . this proposal would require the income tax basis of property received from a decedent or donor to be equal to the estate tax value or the donor’s basis.  

The proposal would be effective as of the date of enactment.

Modify Rules on Valuation Discounts:

The proposal is to create a category of "disregarded restrictions" that would have to be ignored when valuing an interest in a family-controlled entity (such as an interest in a family limited partnership) transferred by one family member to another.  It would apply to transfers after the date of enactment, but would not apply to restrictions created on or before October 8, 1990.  Aucutt comments:

. . . . Using section 2704(b) as a framework, the proposal would create a more durable category of “disregarded restrictions.”  Disregarded restrictions would “include” restrictions on liquidation of an interest that are measured against standards prescribed in Treasury regulations, not against default state law.  Thus, no change in state law would affect the reach of the statute.  In addition, the Greenbook is careful to cast its references in terms of all “entities,” not just corporations or partnerships.

Although the Greenbook does not say so, it is possible that that the “disregarded restrictions” in view, which “include” certain limitations on liquidation (the current scope of section 2704(b)(2)(A)), may also include other restrictions, such as restrictions on management, distributions, access to information, and transferability. . . .

Disregarded restrictions would also include limitations on a transferee’s ability to be admitted as a full partner or other holder of an equity interest, thus apparently overriding any disposition to value a transferred interest as an “assignee” interest.  Treasury would be empowered by regulations to ignore the ownership of certain interests by charities, treating those interests as held by the family. . . .  

 Require Minimum Term for Grantor Retained Annuity Trusts (GRATs):

"Zeroed-out" GRATs survive under the proposals.  Instead, the proposals target short-term and rolling GRATs.  The proposals require GRATs to have a minimum term of ten years.  The 10-year term increases the probability that the grantor will die during the GRAT term -- in other words, it increases the risk that some or all of the GRAT assets will be included in the grantor's gross estate.  The proposal would apply to GRATs created after the date of enactment.  Aucutt comments:

After reciting the history of section 2702 and the use of GRATs, the Greenbook notes that “[t]axpayers have become more adept at maximizing the benefit of this technique, often by minimizing the term of the GRAT (thus reducing the risk of the grantor’s death during the term), in many cases to 2 years, and by retaining annuity interests significant enough to reduce the gift tax value of the remainder interest to zero or to a number small enough to generate only a minimal gift tax liability.”

While rumors have occasionally been heard of congressional plans to limit the attractiveness of GRATs by imposing a minimum gift tax value for the remainder (such as 10%), the Greenbook instead proposes to increase the mortality risk of GRATs by requiring a minimum ten-year term.

The Greenbook proposals are proposals, not law.  But the proposals identify substantive changes in tax legislation that we could see in the next few months.  Again, we will have to wait and see.

Budget Calls for Congress to Do Away with 2010 Estate Tax Repeal

This week, the House and the Senate approved the concurrent budget resolution for fiscal year 2010.  The budget calls for a permanent extension of the 2009 federal estate tax levels -- in other words, a $3.5 million federal estate tax exemption per individual and a 45% top federal estate tax rate.  

The budget also calls on Congress to "extend incentives for enhanced charitable giving from individual retirement accounts, including life-income gifts."  This language refers to extending and expanding the IRA charitable rollover.

The budget resolution does not change current tax laws.  It is a nonbinding document.  Unless Congress acts, the estate tax will be repealed for 2010 and will return with a $1,000,000 federal estate tax exemption in 2011.  But the budget is a blueprint for major tax legislation and indicates Congressional support for a permanent extension of the 2009 federal estate tax levels.

The New York Times and the Wall Street Journal reported on Congress's approval of the budget resolution.

If you'd like a nice roadmap to the federal budget process, the Center on Budget and Policy Priorities offers this overview.


Sen. Baucus Moves to Make 2009 Estate Tax Levels Permanent

Senate Finance Chair Max Baucus (D-MT) has introduced a bill to make the 2009 federal estate tax levels permanent, to unify the estate tax and gift tax, and to allow transfer of a deceased spouse's unused unified credit to the surviving spouse.  The bill -- the “Taxpayer Certainty and Relief Act of 2009”(pdf) -- deals with numerous other tax issues as well, including individual tax rates, the child tax credit, marriage penalty relief, and the alternative minimum tax. 

Under current law, in 2009, the federal estate tax exemption is $3.5 million, the lifetime gift tax exemption is $1 million, and the top federal estate and gift tax rate is 45%.  The federal estate tax is set to be "repealed" for one year in 2010 and will return in 2011 with a $1 million federal estate tax exemption and a 55% top tax rate.  Current law makes no provision for "portability" of a deceased spouse's unused exemption.  In other words, if Fred dies with a taxable estate that is less than his federal estate tax exemption, Fred's excess exemption amount is lost and Wilma can't use it.

What the Bill says:

  • Section 301 of the Bill unifies the estate tax and the gift tax.  In other words, the federal estate tax exemption and the gift tax exemption would be the same.  Instead of a $3.5 million estate tax exemption and a $1 million gift tax exemption, both the estate tax and the gift tax exemptions would be $3.5 million. 
  • Section 301 of the Bill sets the federal estate tax exemption at $3.5 million, adjusted for inflation, and sets the top tax rate at 45%.
  • Section 302 of the Bill creates portability of the deceased spouse's unused exemption.

Attorney Juan C. Alvarez discusses portability under the Bill in his Florida Probate & Trust Litigation Blog.  Attorney Greg Herman-Giddes also discusses the ramifications of portability in his North Carolina Estate Planning Blog.

Portability is not automatic.  The Bill requires the executor of the deceased spouse's estate to make an election on a timely filed federal estate tax return.  If Fred's taxable estate is $2 million and his executor makes a timely election, then, under the Bill, Wilma's exemption for estate and gift tax purposes is her $3.5 million plus Fred's unused $1.5 million.  At a tax rate of 45%, the portability of Fred's unused exemption allows Wilma to pass an additional $675,000 free of federal estate or gift tax.

A Clue to President Obama's Estate Tax Proposal

The estate tax is back in the news.

First, let's review the current law:  If someone dies in 2009, there is a federal estate tax on the portion of the individual's taxable estate that is above $3.5 million.  (The exemption is adjusted if the individual made taxable gifts during his or her lifetime.)  The top rate for the federal estate tax in 2009 is 45%.  In other words, an individual who dies in 2009 can pass $3.5 million free of federal estate tax.  If both husband and wife die in 2009, the couple can pass $7 million free of federal estate tax (depending on the structure of their estate plan).  The federal estate tax is scheduled to disappear for one year in 2010 only to return in 2011 at a $1 million federal estate tax exemption and a 55% top estate tax rate.  

For the past couple of years, you would have been hard pressed to find someone who actually thought that Congress would stand by and let the 2010 repeal happen.  But what the new federal estate tax laws would look like has been anybody's guess.

President Obama has said that his administration will propose new federal estate tax laws this year, but what will they look like?  A clue appears near the end of the President's new budget.  If you take a look at footnote 1 on page 121 near the end of the budget (pdf), you will see that it is based on the assumption that "the estate tax is maintained at its 2009 parameters."  The details of the Obama administration's estate tax proposal are not yet known, but the footnote indicates that the President will propose making the 2009 laws permanent, with a $3.5 million exemption and a 45% top estate tax rate.  

Of course, there other aspects of the estate tax that Congress will need to hammer out in addition to the exemption amount and the tax rate -- for example, will a surviving spouse be allowed to use the deceased spouse's unused federal estate tax exemption?  Congress may also turn its attention to other tax issues relating to the transfer of assets -- will the lifetime gift tax exemption remain at $1 million?  will zeroed out GRATs survive?  what about QPRTs?  will Congress limit the number of generations that assets can pass free of tax in perpetual trusts?  Stay tuned!