On December 3rd the House passed H.R. 4154, the Permanent Estate Tax Relief for Families, Farms, and Small business Act of 2009 by a vote of 225 to 200.
The bill willl permently extend the tax exempton and the maximum tax at the current rate. As of 2009, the estate tax deduction is set at $3.5 million for individuals and $7 million for married couples and the maximum tax rate on estate is 45%.
Last week, Senator Pomeroy introduced H.R. 4154. The bill is scheduled for discussion and a vote later this week.
The language in H.R. 4154 is very short and to the point.
This Act may be cited as the “Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Act of 2009″.
The bill includes this language: ” A bill to amend the Internal Revenue Code of 1986 to repeal the new carryover basis rules in order to prevent tax increases and the imposition of compliance burdens on many more estates than would benefit from repeal, to retain the estate tax with a $3,500,000 exemption, and for other purposes.”
If passed, the bill freezes the maximum gift tax rate and estate tax rate at the current 45%.
Pay attention to the House of Representatives this week! It appears our government is getting ready to decide how to change the current federal estate tax laws over the next couple of weeks.
Will the House of Representatives recommend the 2009 $3.5 million federal estate tax exemption allowance become the permanent allowance starting in the year 2010? Or, will something different be recommended?
If the existing $3.5 million exemption becomes a permanent estate tax allowance, a married couple could use an A/B trust and pass $7.5 million to their heirs free of federal estate tax. Very few estates would be subject to any federal estate tax.
It may become more important to watch what the estate tax laws are in a particular state..and figure out what state not to die in. As the amount of the federal estate exemption allowance has grown from $1 million to $3.5 million over the last several years, some states have not have changed their inheritance or state estate tax laws. For some, the choice of residence may impact the amount of estate taxes due when someone dies.
A recent New York Times article listed 12 states that have some type of estate tax/inheritance tax. http://online.wsj.com/article/SB125694593227919879.html
I know someone who experienced the costly impact of New Jersey state inheritance tax laws. I’ve heard her say time and time again…”DON’T HAVE YOU PARENTS DIE IN NEW JERSEY!!!”
Stay tuned. We’ll be watching what is happening in Congress.. and keep you up to date on the latest developments.
Current estate tax laws:
In 2001, Congress passed the existing federal estate tax laws. The 2001 legislation gradually raised the federal estate tax exemption allowance from $1 million to $3.5 million and reduced the estate tax rate from 55 percent to 45 percent.
In 2009, the federal estate exemption allowance is $3.5 million and the top federal estate tax rate is 45 percent.
In the year 2010, no one would owe any estate tax, no matter what the value of your estate was.
In the year 2011, the estate tax rules would revert to the laws existing in 2001. In 2001, the federal estate exemption allowance was $1 million and the estate tax rate was 55 percent.
2010 Congressional Budget Resolution
In May, 2009, the House and Senate each approved the 2010 Congressional Budget Resolution. Language within this bill extends the 2009 estate tax exemption allowance of $3.5 million and the top estate tax rate of 45 percent for the year 2010 and beyond. Like the current laws, the exemption is for an individual. Married couples would need to do some tax planning in order for their estate to exempt $7 million of their estate from estate taxes.
The budget resolution is not law, but suggests there is agreement in both the Senate and the House to extend the existing 2009 estate tax rules into 2010 and beyond.
Under 2009 law, the Urban-Brookings Tax Institute Policy estimates 97.5% of all estates will not be subject to estate tax.
An Act of Congress describing the details of the estate tax changes and making such changes the law is expected before the end of 2009.
The 2010 Congressional Budget Resolution recommends a personal estate tax exemption allowance of $3.5 million. The value of estates above that would be taxed at 45%. However, the language in the Budget Resolution does not provide for the “portability” of the $3.5 million allowance to a surviving spouse. Without “portability”, the proposed estate tax laws extend the existing married couple estate tax trap.
Existing estate tax rules
What is the existing married couple estate tax trap? Assume a husband and a wife each have property worth $2.5 million. The wife dies first and her will leaves $2.5 million of her assets to her surviving husband. When the husband dies, his estate now includes assets he owns and assets given him when his wife died. The estate tax value of the second spouse to die is $5 million. However, under existing tax laws, the second spouse to die can only claim his $3.5 million exemption. The estate would owe taxes on $1.5 million.
To avoid the married couple estate tax trap, many married couples spend time and money establishing an AB trust. The AB trust enables both couples to claim their $3.5 million tax exemption allowance, and exempts a total of $7 million from estate taxes.
Senate Bill 722
On March 26, 2009, Senator Max Baucus introduced the Taxpayer Certainty and Relief Act of 2009 (S. 722).
Senate Bill 722 provides “portability” of the estate-tax exemption allowance to the surviving spouse. Let’s take the same example. Assume a husband and a wife each have property worth $2.5 million. The wife dies first and her will leaves $2.5 million of assets to the surviving husband. When the husband dies, his estate now includes assets he owns and assets given him when his wife died. The estate tax value of the second spouse to die is $5 million. The “portability” of the estate tax exemption allowance would allow the surviving spouse to claim the $3.5 million exemption allowance available to the first spouse to die and his own $3.5 million exemption allowance.
The “portability” clause would exempt $7 million of the estate of a married couple from any taxation. The value of estates above $7 million would be taxed at 45%. This portability would eliminate the need for married couples to set up an AB trust in order for each couple to claim their individual estate tax exemption allowance.