What's New In Estate Planning?

House OKs Permanent Estate Tax Bill
Without GOP Support; Prospects Uncertain

The House voted 225-200 Dec. 3 to pass and send the Senate a bill (H.R. 4154) that would make permanent the 2009 estate tax rate and exemption levels, although there is no clear path to enactment.

While Democrats argued the $233.6 billion legislation would provide stability and certainty, Republicans argued that death should not be a taxable event and said that while full repeal is preferable, they were open to other options, such as indexing, setting a lower tax rate, and providing higher exemption levels.

"The purpose of this bill is very straight forward, to establish clarity and certainty in the tax code for the estate tax while exempting 99.7% of the estates in this country from this estate tax altogether," said bill sponsor Rep. Earl Pomeroy (D-N.D.). He introduced the bill in November.

The legislation would make permanent the current estate tax rate of 45% and the non-indexed exemption levels of $3.5 million for person.

"They are certainly repealing the hope of ever eliminating the death tax," said Ways and Means Committee ranking member Dave Camp (R-Mich.). "They are replacing that with the certainty of a federal tax rate that at 45% must be considered confiscatory."

Twenty-six Democrats voted with 174 Republicans in opposition, while no Republicans crossed party lines to vote for the legislation. The list of Democrats voting in opposition includes five members of the Ways and Means Committee-Reps. Xavier Becerra (Calif.), Lloyd Doggett (Texas), Jim McDermott (Wash.), Linda Sanchez (Calif.), and Pete Stark (Calif.).

Absent congressional action, the estate tax rate would fall to zero in 2010 and then rebound to 55% in 2011, with an exemption level of $1 million.

Clint Stretch with Deloitte Tax provided Dec. 3 an example to show what would happen to a particular estate under the current system. If a decedent had an estate valued at $5 million in 2009, that person would owe $675,000 if death occurred in 2009, $0 if death occurred in 2010, and just over $2 million if death occurred in 2011.

Some Democrats said the legislation represents a compromise between Republicans' preference for repeal and a bipartisan plan to extend the current estate tax through 2010 and then over the next 10 years reduce the rate from 45% to 35% while raising the exemption from $3.5 million to $5 million for individuals.

Ways and Means Committee Chairman Charles Rangel (D-N.Y.) called the Pomeroy bill the "best possible arrangement so people will know what to expect as it relates to the estate tax."

Chuck Marr, director of federal tax policy with the Center on Budget and Policy Priorities, expressed Dec. 3 support for the Pomeroy bill. "Going beyond 2009 rules would be unjustified, inequitable, and irresponsible," he said.

Marr said the tax has shrunk significantly over the past 10 years, that estates that pay estate taxes owe less than 20 cents on the dollar on average, and that shrinking the tax further as in proposals from Sens. Blanche Lincoln (D-Ark.) and Jon Kyl (R-Ariz.) and Reps. Shelley Berkley (D-Nev.) and Kevin Brady (R-Texas) proposals would add billions to deficits.

According to a February 2009 analysis, CBPP said raising the exemption levels to $5 million for individuals would cost an additional $380 billion over 10 years while benefiting beneficiaries of only the wealthiest three of every 100,000 Americans who die.

Senate Prospects Unclear

The legislation now moves to the Senate where its prospects are unclear because a health care bill (H.R. 3590) is on the floor for the foreseeable future and even if time were made in the schedule for the estate tax, key senators prefer alternate plans.

Senate Finance Committee Chairman Max Baucus (D-Mont.) is on the record in favor of indexing the 2009 exemption levels to prevent the tax from affecting the middle class down the road, while Finance Committee members Lincoln and Kyl have their own plan with lower tax rates and higher exemption levels.

John Readey, an estate and tax attorney with Bryan Cave LLP in Missouri, said Dec. 3 that the House vote was just a first step in the negotiations, but called the vote "good news" because of the certainty it would provide individuals, attorneys, and tax practitioners.

Ways and Means Committee member Rep. Brady called the Pomeroy bill "dead on arrival" in the Senate, saying it is "very unlikely the Senate is going to take a break from health care and other issues to pass a bill they have serious concerns about."

GOP Amendments Defeated

Democrats defeated two Republican motions to recommit seeking to repeal the estate tax. "The only thing worse than bad policy is permanent bad policy," said Rep. Dean Heller (R-Nev.) in reference to the 45% tax rate. "I am sure the American people won't be upset with the certainty of zero."

The cost of the legislation would not be offset. The bill will be attached upon engrossment to the statutory pay-as-you-go budget legislation (H.R. 2920) passed by the House in July.