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 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."

Upcoming Seminar: Presence and Ethics at the End of Life

On November 12th, I will be giving a Silicon Valley Bar Association seminar on Preparing for Dying: Presence and Ethics at the End of Life with sociologist and filmmaker Dr. Michelle Peticolas and estate planning attorney Deborah Radin of Kramer Radin, LLP.  

We will begin the seminar by watching Dr. Peticolas’s award-winning documentary, Caring for Dying: the Art of Being Present.  You can view a trailer for the film here

Deborah Radin will cover the benefits of using advance health care directives to make decisions about the end-of-life.  She will also discuss what an "ethical will" is and how individuals can use ethical wills to transfer their personal values, history and legacy. 

I will discuss estate planning ethical issues and rules of professional conduct when representing a client at the end of life.  If you are an estate planning attorney who has worked with clients in hospice, you are aware that there are numerous ethical issues, including knowing who the client is, undue influence, and capacity.  I plan to cover these and other topics.

Attorneys will receive one hour of ethics credit for attending the seminar.  You can register for the event through the Silicon Valley Bar Association.

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.


September 7520 Rate Remains Low

Federal interest rates for September (pdf) are still very, very low.  The Section 7520 rate remains at 3.4% for a third month in a row.  Likewise, applicable federal rates remain low — the mid-term rate (a 3 to 9 year term) is 2.87% (annual compounding).

Individuals who want to take advantage of low interest rates and low asset values should consider using one or more of the following estate and gift tax planning vehicles:

  • a grantor retained annuity trust (a "GRAT")
  • an installment sale to a grantor trust
  • a qualified personal residence trust (a "QPRT")
  • a charitable lead annuity trust

There is talk among some estate planning commentators that we are unlikely to see legislation enacting a 10-year minimum GRAT as proposed in the Greenbook.  These commentators explain that the ten year minimum can be easily defeated by using a steeply declining GRAT.

Michael Jackson’s Will Makes Sense in California

There is nothing dramatic about the structure of Michael Jackson’s basic estate plan.  At least not in California.  It looks like Michael Jackson set up a revocable living trust (the Michael Jackson Family Trust) and a "pour over" will (pdf).  Most Californians who establish estate plans, even Californians with modest estates, use revocable living trusts to dispose of their property.  The trust, not the will, directs how to distribute the individual’s assets on death.  The will "pours over" to the trust and, in the case of a parent, nominates guardians for minor children. 

The California Bar Association’s pamphlet "Do I Need a Living Trust" describes how a revocable living trust like the Michael Jackson Family Trust works:

What is a living trust?  It is a written legal document that partially substitutes for a will. With a living trust, your assets (your home, bank accounts and stocks, for example) are put into the trust, administered for your benefit during your lifetime, and then transferred to your beneficiaries when you die.

The terms of the revocable living trust are private.  Unlike a will, the trust is not lodged with the court.  The terms of the Michael Jackson Family Trust will not become public unless there is a trust contest or other proceeding involving the trust.  Or the trust is leaked to the public.

One reason Californians prefer to use a revocable living trust instead of a will to dispose of their assets is the high cost of probate in California.  Probating an estate in California is usually much more costly than a trust administration.  From the Bar Association’s pamphlet:

How could a living trust be helpful at my death?

The assets held in your living trust could be managed by the trustee and distributed according to your directions without court supervision and involvement. This can save your heirs time and money. . . .

If your assets (those in your name alone) are not in a living trust when you die, they would be subject to probate. Probate is a court-supervised process for transferring assets to the beneficiaries listed in one’s will. . . .

Probate can take more time to complete than the distribution of property held in a living trust. In addition, assets tied up in probate may not be as readily accessible to the beneficiaries as those held in a living trust. And the cost of a probate is often greater than the cost of managing and distributing comparable assets held in a living trust.

A trust alone will not avoid probate.  After someone sets up a revocable living trust, he or she must take steps to transfer assets to the trust.  (Some assets are not subject to probate and are not transferred to the trust — for example, retirement plans with beneficiary designations.)  Even though Michael Jackson set up the Michael Jackson Family Trust, a probate may still be necessary if "probatable" assets were left outside the trust.  There are some other possibilities, short of a formal probate, such as transferring assets to the trust by means of a Heggstad petition.

From the Bar Association pamphlet:

If I have a living trust, do I still need a will?

Yes. Your will affects any assets that are titled in your name at your death and are not in your living trust or some other form of ownership with a right of survivorship. If you have a living trust, your will would typically contain a pour over provision. Such a provision simply states that all such assets should be transferred to the trustee of your living trust after your death. (This does not mean, however, that your beneficiaries can avoid going through probate for these assets.)

Michael Jackson did what most Californians do when they set up their estate plans.  He established a revocable living trust and a pour over will.  The Michael Jackson Family Trust, and not Michael’s will, dictates how Michael’s estate is to be distributed.  Most likely, the Michael Jackson Family Trust establishes separate share trusts for each of his children.  There may also be distributions to other family members and charity.  The trusts for Michael’s children may last for their lifetimes with distributions to Michael’s future grandchildren.  Or the trusts for his children may terminate during their lifetimes.  We don’t really know. 

Which brings us to another reason Californians prefer revocable living trusts to wills — privacy.