Proposed Changes to Federal Estate Tax Laws


Baucus Bill. Senate Finance Committee Chairman Max Baucus (D-MT) introduced the Taxpayer Certainty and Relief Act of 2009 (the “Act”) in the Senate which would make permanent the 2009 rates and exemptions for estate tax and generation-skipping transfer (“GST”) tax, and would reunify the estate tax and gift tax by increasing the gift tax exemption to $3,500,000.

Under current law, in 2010, the estate tax and GST tax will be eliminated and the gift tax rate will be reduced to 35%. However, in 2011, the estate tax, gift tax, and “GST” tax will revert back to pre-2001 levels, with a $1,000,000 exemption and a maximum tax rate of 55%. The Act would freeze the tax rate for gift, estate, and GST taxes at 45%, and the exemption amounts for gift, estate, and GST taxes would be set at $3,500,000 and indexed for inflation beginning in 2011.

The Act also includes a portability provision that allows a surviving spouse with an estate that exceeds the applicable estate tax exemption to apply any unused portion of the deceased spouse’s exemption; however, the deceased spouse’s unused exemption is not indexed for inflation after his or her death. This portability provision applies to the estate tax and gift tax, but does not apply to the GST tax.

Farmers and ranchers would also benefit from the Act, with an increase in the maximum valuation reduction under the special use valuation rules that permit an executor to value business realty in accordance with its actual use value, rather than its fair market value. The maximum valuation reduction would be $3,500,000, indexed for inflation beginning in 2011.

Amendment to President Obama’s Budget Plan. Under President Obama’s original budget proposal, the 2009 rates and exemptions would continue, with the estate tax exemption at $3,500,000 and the maximum estate tax rate at 45%. An amendment to President Obama’s budget plan approved by the Senate (by a vote of 51-28) on March 31, 2009 would increase the estate tax exemption to $5,000,000 and reduce the maximum estate tax rate to 35%, beginning in 2010. A subsequent amendment (by a vote of 56-43) to this provision offered by Senator Durbin (D-IL) would require “equal” tax cuts for taxpayers with annual incomes of less than $100,000. Neither the President’s budget nor any of these amendments actually amend the estate and gift tax law, but they do provide some insight into the debate we expect later this year when Congress addresses the issue. It is likely that some of the Senators voting for the first amendment may not vote the same way on a tax bill because they immediately voted for an amendment that would make implementation of the estate tax cuts virtually impossible.

Stay tuned: we will bring you further updates in the coming weeks and months.

If you have any questions, please feel free to contact one of the attorneys listed below. For more information about the Private Clients and Estate Planning Group practice go to Private Clients and Estate Planning.

*Board Certified – Estate Planning and Probate Law and Tax Law by the Texas Board of Legal Specialization

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