FLASH: Congress Acts On Estate Tax Changes (but don’t get too excited yet)

December 7, 2009

Last week, by a vote of 225 to 200, a permanent extension of the 2009 federal estate tax law was passed – by the House of Representatives. We want to caution our clients that what was passed is NOT the end of the story – but only the beginning of the end of the story. A permanent change in our estate tax laws has a long way to go.
The House passed H.R. 4154, the Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Act of 2009. Under the bill, the federal estate tax will not be repealed for one year in 2010 and then reappear in 2011 as scheduled. Rather, the current estate tax exclusion amount of $3,500,000 per person ($7,000,000 per married couple) is made permanent and the maximum estate and gift tax rates are frozen at 45 percent. These changes apply to estates of decedents dying, and gifts made, after December 31, 2009.
H.R. 4154 also prevents the unworkable switch (scheduled to take effect in 2010) from step-up to carryover basis.
We suggest that clients and their advisors not invest undue time concentrating on what H.R. 4145 says because a lot can happen (or not happen) between now and December 31 in the Senate. In addition, several Democratic senators have expressed interest in indexing the estate tax exemption to inflation. There is no such provision in the bill passed by the House. Finally, Republicans have stated they hope to attain a lower maximum rate of 35% and a higher $5 million exemption.
What’s more important than what this bill says – is what it doesn’t say. It does not at all impact GRATs (a popular planning tool in times of low interest rates to shift future appreciation tax-free to younger generations), valuation discounts, or anything other than the few things mentioned above. That, of course, does not mean these changes will not occur in 2010. In fact, we believe it is likely that there will be several major changes that will foreclose planning opportunities for people with estates in excess of $3,500,000 (or $7,000,000 for a married couple) and that time is of the essence in taking advantage of the still-open window. It is possible that the sun is setting on planning opportunities that currently exist taking advantage of historically low interest rates, low asset values, and the availability of valuation discounts.
P.S. For all the emotion that gets stirred up when Congress discusses the federal estate tax, it is interesting to note that the Congressional Budget Office estimates that of all the people in the United States who die in 2009, only 0.23% of them will have estates large enough (i.e., in excess of $3,500,000) to attract the federal estate tax.
At Ruder Ware, we have an experienced team available to answer all your estate planning questions and prepare the documents necessary to carry out your intentions. These include wills, powers of attorney, revocable trusts, and irrevocable trusts.
If you have questions regarding the above, please contact Mark Bradley, the author of this article, or any of the attorneys in the Trusts & Estates Practice Group of Ruder Ware.

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