Future of the Federal Estate Tax

On September 16, 2010, the Senate passed H.R.5297; GRAT restrictions were not in the bill

On September 16, 2010, H.R. 5297 was passed by the Senate with an amendment by Yea-Nay Vote. 61 - 38. Record Vote Number: 237.  GRAT restrictions were not in the final bill.

Note that the following bills are distinguishable in at least one relevant way – the version placed on the Senate calendar has Section 531, which contains the GRAT restrictions, but the latter does not have Section 531:

• H.R.5297 -- To create the Small Business Lending Fund Program to direct the Secretary of the Treasury to make capital investments in eligible institutions in order to increase the availability... (Placed on Calendar Senate - PCS, pdf)
• H.R.5297 -- Small Business Jobs Act of 2010 (Engrossed Amendment Senate - EAS) (found here, last entry)

This post confirms my earlier one: Senate version of H.R. 5297 no longer includes restrictions on GRATs (7/6/10). 

Some are wondering how much lobbying money it took to get Section 531 out of the bill.  Others want to know where to send their “thank you” notes.  Regardless, it is important to continue to consider the following:

• Ashlea Ebeling, Goodbye GRATs?, Forbes, March 24, 2010.  (Ebeling’s article was blogged about here.)
• Hani Sarji, Johnson: "Wealthy might have to kiss their GRATs goodbye", Future of the Federal Estate Tax, April 6, 2010.
• Francis W. Dubreuil, Transfer Opportunities in Advance of GRAT Legislative Change, Trusts & Estates, May 19, 2010.

(These are a few of the many articles that discussed the possibility of GRAT restrictions.)

I updated the Estate Tax Bills in Front of Congress to reflect the status of H.R. 5297.  (An update to Latest on GRATs is forthcoming.)

(Special thanks: Michael Hepner, a benefits professional.)

Recent articles explain that, for the right families, 2010 is an ideal year to transfer wealth to younger generations

[1] No pressing news regarding the federal estate tax.

Although the federal estate tax is being mentioned in many articles, there is no pressing news.  In Nothing to Report (Estate Tax News Blog by Kevin Staker, 8/24/10), Kevin Staker laments about “nothing worthy to report”:

This author searches the Internet several times a day for any news re the estate tax worthy to report. I find it interesting there has been nothing worth reporting since August 4th. Congress being out of session most likely is the cause. 

[2] Focus has shifted to taking advantage of the gift tax.

Journalists are using this break from the estate tax to educate readers about the gift tax opportunity that exists in 2010.  Here are recent articles on the 2010 gift tax opportunity:

[2.1] Joseph A. Giannone, For the rich, 'tis better to give than wait, Reuters, Aug. 18, 2010.

Giannone provides several reasons why 2010 is a good year to gift assets to younger generations: (1) “U.S. taxes [are] almost guaranteed to rise next year,” (2) “[a] weak economy has led to razor-thin interest rates and beaten-down valuations.” 

With regards to taxes rising next year, Giannone elaborates that (1) “capital gains taxes are going t rise,” (2) “top earners may pay nearly 40 percent of their income,” (3) generation-skipping transfer tax rates “are likely to return next year at rates as high as 55 percent,” (4) gift taxes “are set to bounce back to 55 percent next year.” 

Giannone writes, “Contrary to the usual advice, investors should record income and capital gains now, but defer charitable deductions until next year.” 

Giannone suggests various strategies for shifting wealth: (1) intra-family loans, (2) GRATs, (3) charitable lead trusts, and (4) “assets sold into a trust.”

[2.2] Deborah L. Jacobs, Five Ways To Freeze Out Uncle Sam, Forbes.com, Aug. 25, 2010.

Jacobs’s article picks up where Giannone’s article concludes.  Giannone suggests four strategies to transfer wealth to younger generations.  Jacobs elaborates on these strategies in some detail.  She also discusses an additional strategy that is appropriate in our low interest rate, depreciated asset environment: revising existing GRATs.

Jacobs’s article is rich with details, which are presented in plain English.  For example, Jacobs teaches about the AFR and the Sec. 7520 rate, and when each is used. 

(In a previous blog entry, I suggested how Jacobs’s article can empower readers.) 

[2.3] Paul Sullivan, A Year to Give Gifts to Your Heirs, and Save on Taxes, NY Times, Aug. 27, 2010. 

Sullivan provides three reasons that make 2010 “a year to give gifts to your heirs”: (1) low tax rates, (2) “the values of many assets are still depressed,” and (3) no generation-skipping transfer tax in 2010. 

Sullivan outlines some of the risks involved with giving gifts: (1) “certain techniques guaranteed an audit” by the IRS, and (2) psychological effects on those who receive large sums of money without incentives. 

Sullivan concludes with the following advice: “Beating the federal government at the tax game is great, but damaging the lives of your heirs in the process could make it a Pyrrhic victory.”

[2.4] Bucks Editors, Will You Give More Gifts to Your Heirs This Year?, Bucks, Aug. 27, 2010.

This entry summarizes Sullivan’s article.  There are four comments to the entry.  One comment is by Deborah L. Jacobs.  Jacobs’s comment is informative and should be read in conjunction with Sullivan’s article:

Without elaborating, Paul Sullivan notes that making gifts this year to trusts that will benefit grandchildren raises the risk that all the assets will be taxed when they are withdrawn. It's important to note that the same risk applies to gifts to custodial accounts (used for grandchildren who are minors) as well as deposits to 529 savings accounts for their benefit. The problem, in all these cases, is that since there is no generation-skipping transfer tax, and no exemption either right now, it is impossible to apply GST exemption to any of these entities. So the prudent course of action is to only make cash gifts this year to grandchildren who have already reached the age of majority.

[3] What can you do?

[3.1] I recommend printing out the articles above on gifting opportunities and risks in 2010.  These articles are very good.  There is added value in reading them together. 

[3.2] To continue your studies, you can purchase (and maybe give away as a gift) Deborah Jacobs’s book on estate planning, Estate Planning Smarts: A Practical, User-Friendly, Action-Oriented Guide.  Some professors have seen the benefit of an easy-to-understand explanation of estate planning and are assigning the book to their students.  See An uncasebook about estate planning?

Looking ahead: estate tax uncertainty and GRAT restrictions

Today, Congress returns from its Independence Day District Work Period, and its next break will shortly follow: August 9–September 10, Summer District Work Period. 

[1] Estate tax uncertainty is likely to persist.

Many do not expect Congress to act before the elections in November.  Some do not expect Congress to act at all in 2010.  A recent Wall Street Journal article states,

Many Washington insiders are betting Congress won't act this year because of an overflowing to-do list, the fall election and fewer than 40 working days left in 2010. At least one near-deal has failed the Senate this year.

Pressure to act will likely grow following the November elections, when Congress is expected to address many other expiring Bush-era tax breaks, including income taxes and capital-gains rates.

[2] Congress is “strongly considering” restricting GRATs.

A number of bills that would restrict grantor retained annuity trusts have been introduced in the 111th Congress.  A June 30, 2010 alert published by WilmerHale – Proposed Legislation Threatens Grantor Retained Annuity Trusts (GRATs)– sums up the status of GRAT restrictions:

Congress is strongly considering legislation requiring a minimum ten-year term for GRATs. While no legislative proposal has yet been passed by either the House or the Senate, it is possible that any new restriction on GRATs could become law within the next few weeks or months. Furthermore, it is too early to tell whether any such legislation will follow the Treasury Department's recommendation that new requirements apply only to GRATs created after the date of enactment, or whether such requirements will be imposed retroactively to some earlier date.

S.3548, Extend COBRA Premium Assistance Program Act of 2010, would restrict GRATs

On June 29, 2010, Sen. Robert P. Casey [D-PA] introduced S.3548, "Extend COBRA Premium Assistance Program Act of 2010."  Section 2(b) of S.3548 would restrict grantor retained annuity trusts by requiring a minimum 10-year term and a remainder interest that has a value greater than zero determined as of the time of the transfer.  There are currently ten cosponsors for this bill. 

(Special thanks to Constance for alerting me to S.3548 in comment on 7/7/10.)

On July 1, 2010, the House passed another bill that would restrict GRATs: H.R. 4899

On July 1, 2010, the House of Representatives passed an amended version of H.R. 4899 -- The Supplemental Appropriations Act of 2010 -- that includes restrictions on GRATs.  The Senate will re-consider this bill. 

In House Passes GRAT, Biofuel Limits in Spending Bill (Tax Notes Today, Doc 2010-14832, 2010 TNT 128-2), Chuck O'Toole informs, “[t]he House voted 215-210 to approve the resolution (H. Res. 1500) that added the tax provisions to H.R. 4899.”  The text of H. Res. 1500 is available on Thomas.gov, here.

GOP.gov provides this summary of the proposed restrictions on GRATs in H.R. 4899:

Grantor Retained Annuity Trusts:  The bill would require a minimum ten year term for any grantor retained annuity trust (GRAT) wherein donors place property into trust and then receive an annuity payment for a fixed period of time.  GRATs are used to transfer property to family members while the donor is still alive in order to avoid double taxation in the form of the gift tax or the death tax.  This provision would make the use of a GRAT less beneficial and was included in the president’s budget and referred to as closing a tax “loophole.”  According to the president’s budget, the legislation would increase taxes by $2.9 billion over ten years.

(Special thanks to Jeff Cook (President and CEO, Policy and Taxation Group) for alerting me to the restrictions on GRATs in H.R. 4899.)

[Updated 7/6/10 at 2:50 PM to correct an error in the title and opening sentence.  The House vote happened on July 1 and not June 1.]

Senate version of H.R. 5297 no longer includes restrictions on GRATs

[1] In Senate Small Business Bill Does Not Include GRAT Provision, Estate Tax Questions Remain (6/30/10), Policy and Taxation Group reported that the Senate version of H.R. 5297 no longer includes the restrictions against grantor retained annuity trusts. 

[2] This news might seem odd.  I previously blogged that the Senate version of H.R. 5297 contains restrictions on GRATs: H.R. 5486, which would restrict GRATs, has been added as a new matter to the end of H.R. 5297, which the House passed on June 17, 2010 (6/18/10).  Furthermore, all versions of H.R. 5297 that are currently available on Thomas.gov indicate that the restrictions on GRATs are in section 531 of the Senate version of the bill.

[2.1] In an e-mail answering my inquiry, Jeff Cook (President and CEO of Policy and Taxation Group) explained, “The Senate is proceeding with a Baucus substitute for the bill, and the substitute does not include the GRAT provision.” 

[2.2] On June 29, 2010, the Senate Committee on Finance published a summary and text of amended H.R. 5297:

• Summary of the Small Business Jobs Act [379.3 KB]
• Legislative Text of the Small Business Jobs Act. [362.8 KB]

Restrictions on GRATs are longer among the offsets.

[2.3] On June 30, 2010, the Congressional Budget Office published estimated direct spending and revenue effects for Senate amendment 4402, a substitute for H.R. 5297: H.R. 5297, Small Business Jobs Act of 2010(PDF).

[3] The post by Policy and Taxation Group further informs that despite the latest amendment being passed, “estate tax questions remain.”  The amended Senate version of the bill has to be reconciled with the House version of the bill, which does include restrictions on GRATs.

(Special thanks to Jeff Cook for explaining the status of the law.)

The Senate is scheduled to continue considering H.R. 5297 on June 29, 2010

The Senate is scheduled to continue considering H.R. 5297 on June 29, 2010.  The cloture vote on the motion to proceed is scheduled for 2:15 PM.  Here are the details from the June 28, 2010 Daily Digest:

Small Business Lending Fund Act--Agreement: A unanimous-consent agreement was reached providing that the cloture vote on the motion to proceed to consideration of H.R. 5297, to create the Small Business Lending Fund Program to direct the Secretary of the Treasury to make capital investments in eligible institutions in order to increase the availability of credit for small businesses, to amend the Internal Revenue Code of 1986 to provide tax incentives for small business job creation, be delayed to occur at 2:15 p.m., on Tuesday, June 29, 2010, further that if cloture is invoked on the motion to proceed, then all post-cloture time be considered yielded back, and Senate then proceed to the consideration of the bill.

Page S5501

A unanimous-consent agreement was reached providing that Senate resume consideration of the motion to proceed to consideration of the bill at approximately 11 a.m., on Tuesday, June 29, 2010.

CBO publishes cost estimates for H.R. 5297, Small Business Lending Fund Act of 2010

On June 28, 2010, the Congressional Budget Office published cost estimates for H.R. 5297, Small Business Lending Fund Act of 2010. 

H.R. 5297 would restrict grantor retained annuity trusts (“GRATs”) to fund various measures intended to help small businesses.  Here is what the CBO report states regarding GRATs:

Minimum Term for Certain Trusts. The legislation would require that grantor-retained annuity trusts have a minimum 10-year term to qualify for a reduced valuation upon transfer for purposes of gift taxation. JCT estimates that the provision would increase revenues by $5.3 billion over the 2010-2020 period.

H.R. 5297 would restrict GRATs in the same manner as H.R. 4849.  H.R. 5927 is currently being considered in the Senate.  Here is the Senate’s Floor Schedule for June 29, 2010:

10:00 a.m.: Convene and begin a period of morning business.

Thereafter, resume consideration of the motion to proceed to H.R.5297, the Small Business Lending Fund Act of 2010.

In a WSJ article, Laura Saunders reports on introduction of S.3533

On June 25, 2010, the Wall Street Journal published, Sanders Estate-Tax Proposal Would Hit Wealthy Harder, by Laura Saunders.  Here are a few highlights:

The changes would be retroactive to Jan. 1 of this year.

"The Sanders proposal is one extreme in the current debate," said Clint Stretch, an analyst at Deloitte Tax. "The challenge for the Senate is whether the members can agree to anything at all." . . .

Iowa Sen. Charles Grassley, the highest-ranking Republican on the Senate Finance Committee, said "I welcome the other side's finally putting a proposal on the table."

Sen. Sanders: press release and video on S.3533

On June 24, 2010, the following press release regarding S.3533 was posted on Sen. Bernard Sanders’s website:

WASHINGTON, June 24 – Sen. Bernie Sanders (I-Vt.) today introduced legislation to restore the estate tax on the wealthiest Americans.  The proposal would bring in at least $264 billion over a decade to help lower the national debt.

“This legislation would ensure that the wealthiest Americans in our country, millionaires and billionaires, pay their fair share while exempting 99.7 percent of Americans from paying any estate tax whatsoever,” Sanders said.

The estate tax was abolished this year as a result of tax law changes signed into law by President George W. Bush in 2001. For the first time since 1916, heirs to multi-million and billion dollar fortunes may receive their entire inheritance free of any federal taxes, a giveaway that will cost the U.S. treasury at least $14.8 billion in lost revenue this year alone.

“At a time when we have a record-breaking $13 trillion national debt and a growing gap between the very rich and everyone else, people who inherit multi-million and billion dollar estates must not be allowed to avoid paying their fair share in estate taxes,” Sanders said.

Sanders has made deficit reduction a priority, proposing legislation in the last month alone to repeal more than $35 billion in oil company tax breaks and  commissioning Government Accountability Office studies spotlighting more than $20 billion in Pentagon waste on unneeded spare parts.

“I get a little bit tired of being lectured by Republicans for the deficit we are in,” Sanders said, noting that Bush-era Republicans funded but failed to pay for wars in Iraq and Afghanistan; tax breaks for the wealthy; a prescription drug bill written by the pharmaceutical industry; and a $700 billion Wall Street bailout.

Sanders estate tax legislation is cosponsored by Sens. Tom Harkin (D-Iowa), Sheldon Whitehouse (D-R.I.), and Sherrod Brown (D-Ohio). The bill would:

• Exempt the first $3.5 million of an estate from federal taxation ($7 million for couples), the same exemption that existed in 2009.  That would leave 99.75 percent of all estates exempt from the federal estate tax next year.

• Create a progressive rate so the super wealthy pay more.  The tax rate for estates valued between $3.5 million and $10 million would be 45 percent, the same as the 2009 level.  The rate on estates worth more than $10 million and below $50 million would be 50 percent, and the rate on estates worth more than $50 million would be 55 percent.

• Include a billionaire's surtax of 10 percent.  According to Forbes Magazine, there are only 403 billionaires in the United States with a collective net worth of $1.3 trillion.  Clearly, the heirs to these multi-billion fortunes should be paying a higher estate tax rate than others.

•    Close estate and gift tax loopholes as President Obama proposed in his budget for next year. The White House estimated that closing the loopholes would generate at least $23.7 billion in revenue over 10 years.

• Protect family farmers by allowing them to lower the value of their farmland by up to $3 million for estate tax purposes. The bill also would increase the maximum exclusion for conservation easements to $2 million.  The non-partisan Tax Policy Center has estimated that only 80 small businesses and farm estates throughout the country paid an estate tax in 2009, affecting only three out of every 100,000 people who passed away.

Additionally, the following video was posted: