LISI Commentator Team Member Michael J. Jones, CPA is a partner in Thompson Jones LLP (www.thompsonjones.com).  Mike focuses his practice on estate planning. He is the author of The Pension Answer Book: Special Supplement on the Final Regulations Governing Minimum Required Distributions (Panel Publishers, June 2002).

Mike has written and lectured extensively on advanced estate planning topics and serves on the Editorial Advisory Board of Trusts and Estates as Chair, Retirement Benefits Committee.

Mike brings LISI members up-to-date on what's happening in Washington on estate tax law.  And it's all coming together very quickly!

EXECUTIVE SUMMARY:

Members of a House and Senate negotiating committee have worked out a compromise resulting in permanently keeping the estate tax at 2009 levels.

Specifically, individuals could exempt $3.5-million from taxes ($7-million for couples), with amounts above that taxed at a 45 percent rate.

This is essentially the House version of the legislation.

LISI has heard the full House and Senate may vote on the budget blueprint VERY soon!  (We don't have details yet on integration of the gift and estate tax law and/or portability).  We will, of course, keep you posted.

FACTS:

SENATE ACTION:

A budget recently passed by the Senate would have cut the estate tax by raising the exemption for individuals to $5-million ($10-million for couples) and would have lowered the tax rate to 35 percent.

Senators, Blanche Lincoln, D-Ark., and Jon Kyl, R-Ariz., proposed an amendment that would exempt estates up to $5 million per person and levy a maximum rate of 35 percent, as long as the tax cut didn't increase the deficit.

Every Republican and 10 Democrats voted for the amendment. It passed 51-48.

HR 2023:

Numerous bills have been introduced but just last week, Rep. Jim McDermott, D-Wash introduced a bill that would tax estates over $2 million per person at a maximum rate of 55 percent.  (More on this below).

CONFERENCE COMMITTEE:

When the House-Senate conference committee met, it settled on the House version.

WHAT KICK STARTED CONSENSUS  

Perhaps some of the impetus for that settlement came from The Combined Federal and State Marginal Estate Tax Rates Under H.R. 2023 Sensible Estate Tax Act of 2009. 

Mike Jones explains below the impact H.R. 2023 would have had.

H.R. 2023, introduced by Jim McDermott, a Washington Democrat, would amend the Internal Revenue Code of 1986 to reform the estate and gift tax.

The 2009 system uses a 45% marginal federal rate on all taxable estates in excess of the $3.5 million applicable exclusion amount. State death taxes may be deducted in arriving at the taxable estate.

H.R. 2023 would have sent estate tax rates to the moon by disallowing the deduction for state death taxes, lowering the applicable exclusion amount to $2 million (although the AEA is portable between spouses) and adopting the following tax rate schedule:

Taxable Estates Over	Federal Rate
$2,000,000	45%
$5,000,000	50%
$10,000,000	55%

Assuming state estate tax rates are the "old" state death tax credit rates, formerly known as the "pick up tax," here are the combined marginal rates under H.R. 2023:

Taxable Estates Over	State	Federal	Combined
$2,040,000	8.0%	45%	53.0%
$2,540,000	8.8%	45%	53.8%
$3,040,000	9.6%	45%	54.6%
$3,540,000	10.4%	45%	55.4%
$4,040,000	11.2%	45%	56.2%
$5,000,000	11.2%	50%	61.2%
$5,040,000	12.0%	50%	62.0%
$6,040,000	12.8%	50%	62.8%
$7,040,000	13.6%	50%	63.6%
$8,040,000	14.4%	50%	64.4%
$9,040,000	15.2%	50%	65.2%
$1,000,000	15.2%	55%	70.2%
$10,040,000	16.0%	55%	71.0%

Here's how that compares to what we have in 2009:

Taxable Estates Over	Old Combined Rate (45% federal, deduction state death tax allowed)	Rate Increase	Percentage Increase In Combined Marginal Tax Rate
$2,040,000	49.4%	3.6%	7.3%
$2,540,000	49.8%	4.0%	7.9%
$3,040,000	50.3%	4.3%	8.6%
$3,540,000	50.7%	4.7%	9.2%
$4,040,000	51.2%	5.0%	9.9%
$5,000,000	51.2%	10.0%	19.6%
$5,040,000	51.6%	10.4%	20.2%
$6,040,000	52.0%	10.8%	20.7%
$7,040,000	52.5%	11.1%	21.2%
$8,040,000	52.9%	11.5%	21.7%
$9,040,000	53.4%	11.8%	22.2%
$1,000,000	53.4%	16.8%	31.6%
$10,040,000	53.8%	17.2%	32.0%

So, a $4 million estate gets a 9.2% tax hike, and an $11 million estate would have been hit with a whopping 32% tax hike.

WHAT'S COMING?  WHERE'S IT GOING? (IT AIN'T OVER TILL IT'S OVER!)

Ronald Aucutt, a partner at McGuireWoods, said that

"people interested in the estate tax should focus on what happens as the House and Senate try to work out their differences in the budget reconciliation process."

The most likely outcome, he says, is that the 2009 estate tax is made permanent, with the $3.5 million exemption indexed to inflation.

Ron feels "It's also likely that Congress will make the estate tax exemption "portable" for married couples."

Will Ron's prediction be "right"?  The pot is about to boil!

STAY TUNED TO LISI FOR THE LATEST ON THE ESTATE TAX!

HOPE THIS HELPS YOU HELP OTHERS MAKE A POSITIVE DIFFERENCE!

Mike Jones

CITE AS:

LISI Estate Planning Newsletter # 1453  (April 28, 2009) at http://www.leimbergservices.com   Copyright 2009 Leimberg Information Services, Inc. (LISI).  Reproduction in Any Form or Forwarding to Any Person Prohibited – Without Express Permission