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.