Estate Tax Update

June 29, 2010

A number of bills have been introduced in the U.S. Congress to deal with the estate tax situation that we described in a previous legal update. See “Questions and Answers Concerning Status of Federal Estate Tax”, December 2009. Last week Senator Bernard Sanders introduced yet one more piece of estate tax reform legislation. In what he and Senators Tom Harkin and Sheldon Whitehouse call the Responsible Estate Tax Act, a $3.5 million per person exemption would be allowed coupled with a progressive rate structure and a 10 percent surtax on billionaires.
Referring to the fact that in 2010 there is no estate tax in the United States, the three Senators stated that “for the first time since 1916, the heirs to multimillion and billion dollar fortunes are able to receive their entire inheritance free of federal taxes, costing at least $14.8 billion in lost revenue in 2010 alone.” The three Senators asked their colleagues to join them in sponsoring the Responsible Estate Tax Act, which would:

Exempt the first $3.5 million of an estate from federal taxation ($7 million for couples). (According to their estimates, this would exempt 99.75 percent of all estates from the federal estate tax in 2011).
Include a progressive rate structure so that the super wealthy pay more.

The rate for the value of the estate above $3.5 million and below $10 million would be 45 percent, the same as the 2009 level.
The rate on the value of estates above $10 million and below $50 million would be 50 percent.
The rate on the value of estates above $50 million would be 55 percent.

Impose a 10 percent surtax on the value of an estate above $500 million ($1 billion for couples).
Protect family farmers by allowing them to lower the value of their farmland by up to $3 million for estate tax purposes
Benefit farmers and other landowners by providing estate tax relief for conservation easements
Modify rules on valuation discounts and require consistent valuation for transfer tax purposes and income tax purposes. These measures would prevent taxpayers from using certain discount valuation strategies that are available currently
Require a 10-year minimum term for Grantor Retained Annuity Trusts (GRATS). (See our February 2010 Legal Update, “The Window of Opportunity for Some Types of Planning May Be Closing (Quickly).”

Will this proposal gain traction? Can members of Congress who have not been able to agree on any previous estate tax bill reach a bi-partisan compromise? Can any bi-partisan compromise get the 60 votes that are required in the Senate for this type of measure? Purportedly, this new proposal will be retroactive to January 1, 2010. Will that stand up to a constitutional challenge?
Still many questions – and few answers!
Our Trust & Estates attorneys are closely monitoring developments in the estate, gift and GST tax laws. If you have questions about your planning needs, please contact one of the attorneys in the Trusts & Estates Practice Group of Ruder Ware.

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