Future of the Federal Estate Tax

Martin Vaughan: business groups that oppose estate tax are willing to back short-term compromise

On November 5, 2010, NASDAQ.com published Business Groups Back Quick Compromise On Estate Tax, by Martin Vaughan: 

Business groups that oppose the federal estate tax say they are willing to back a short-term compromise with congressional Democrats, in order to avoid the tax returning to its highest level in 10 years.

However, Republicans in Congress aren't ready to back down from their demands for an estate tax rate of 35%, setting up one of the more unpredictable tax battles in Congress's lame-duck session.

A political stalemate would be the worst possible outcome for the business lobby. . . .

Even mainstream Democrats want to prevent the higher rates from taking effect in 2011. They have proposed a permanent rate of 45%, with the first $3.5 million of estate wealth exempt--the parameters that were in effect in 2009.

Martin Vaughan: "the new political landscape does little to dispel the uncertainty that has clouded . . . the estate tax"

On November 4, 2010, NASDAQ.com published Obama Tax Agenda Likely Sidelined By GOP House Take-Over by Martin Vaughan (Dow Jones Newswires):

The Republican takeover of the U.S. House will sideline much of President Barack Obama's tax agenda, including proposals to repeal tax breaks for multinational firms and oil companies. . . .

But the new political landscape does little to dispel the uncertainty that has clouded the future of individual tax rates, the estate tax and popular business tax breaks like the research tax credit.

Republicans are vowing to resist any and all tax increases, casting doubt on whether there is room for agreement on a broader tax-and-spending deal with Obama.

Martin Vaughan (WSJ): "Estate Tax Choice May Be In Works For 2010 -Treasury Official"

On September 13, 2010, the Wall Street Journal (Dow Jones Newswires) published Estate Tax Choice May Be In Works For 2010 -Treasury Official, by Martin Vaughan:

The estates of those who died this year might be allowed to be taxed as if they died in 2009, in order to resolve a problem created by the repeal of the estate tax, a Treasury Department official said. . . . 

"We need to figure out what to do with this gap period, and one possibility would be to look to filling that gap with an election to apply 2009 law," Mundaca said.

Vaughan reviews other options that are available:

Another option would be to impose estate tax rules retroactively for 2010, but that would be opposed by congressional Republicans and likely some Democrats. A third option would be to leave 2010 law the way it is and pass estate tax changes only prospectively.

See also: Kim Dixon (Reuters): "Obama mulls estate tax choice", Future of the Federal Estate Tax.

(Hat tip: Michael Hepner, a benefits professional; and DPD, a 2010 beneficiary.  You will learn more about DPD in a forthcoming post.)

Notes and resources on the Lincoln-Kyl proposal to add permanent estate tax fix to H.R. 5297

Notes on the proposal by Sens. Blanche Lincoln [D-AR] and Jon Kyl [R-AZ]:

• Stated purposes?  To help “hardworking farmers and small businesses” and to take Congressional action to bring certainty to the federal estate tax. (See press release.)
• Method?  The proposal is not a new bill.  Instead, the proposal would require the Senate Finance Committee to amend H.R. 5297, the Small Business Lending bill.  Senator Kyl explains why the proposal would be added as an amendment: “If the Small Business Lending bill is intended to help small business create jobs, wouldn’t it make sense to provide small business owners with the certainty that their tax rates aren’t going to skyrocket at the beginning of next year?” (From press release.)
• Estate tax rate? 35% (permanent).  Note, however, that the Motion to Commit states that the rate will be “a 35 percent estate tax rate phased in over 10 years.”
• Exemption?  $5M phased in over 10 years.
• Indexed for inflation?  Yes.
• Basis?  Stepped-up basis (election for modified carryover basis in 2010). 
• Retroactivity?  Yes, but optional: “The Lincoln-Kyl proposal provides an election for deceased taxpayers to either retain this year’s estate tax rate, which is zero percent with ‘carry over basis,’ or file under the provisions of the new bill.” (From press release.)
• Offset?  Yes.  The “proposal also instructs the Senate Finance Committee to offset the difference in revenue loss between the Obama administration’s proposed 45 percent estate tax rate with a $3.5 million exemption amount and their proposed reform.” (From press release.)

History:

• The press release states, “Senators Lincoln and Kyl introduced a similar measure in April 2009 that received broad bipartisan support and was successfully added to the non-binding congressional budget resolution.”  But the April 2009 measure was criticized by the Center on Budget and Policy Priorities.  Chuck Marr and Jason Levitis, Lincoln-Kyl Estate Tax Amendment is Both Unnecessary and Unaffordable, CBPP, Apr. 10, 2009.
• A few months ago, Sens. Lincoln and Kyl tried to gather support for their proposal, but their efforts were stalled.  Again, their proposal was criticized by the CBPP.  Chuck Marr and Gillian Brunet, Stalled Proposal to Cut Estate Tax Further Is Deeply Flawed and Should Not Be Revived, CBPP, May 21, 2010.
• N.B. I commented on the CBPP reports in a previous blog post, Two reports published by the Center on Budget and Policy Priorities criticize the stalled proposal to cut the federal estate tax (May 21, 2010).  I made the following observation regarding the second CBPP report: “It is interesting to note that the report has ‘gimmicks’ of its own.  It does not criticize just the recent proposal. . . . So, despite its title, the scope of the report is vaster than just the stalled proposal.  This is a classic technique, or ‘gimmick,’ used in media activism: re-frame the conversation to make sure your cause’s points are discussed.”

Resources:

• Press release: U.S. Senator Blanche Lincoln: Lincoln, Kyl Introduce Estate Tax Reform Proposal (July 14, 2010)
• Motion to Commit With Instructions 
• Text of H.R. 5297 

See also:

• Paul Caron, Kyl-Lincoln Estate Tax Fix: $5m Exemption, 35% Rate, Election for Decedents Dying in 2010, TaxProf Blog, July 14, 2010 (linking to press release and motion to commit). 
• Sam Goldfarb, Lincoln, Kyl to Offer Estate Tax Motion on Small-Business Bill, Tax Notes Today, Doc 2010-15662, 2010 TNT 135-1, July 15, 2010  (“The Senate is not expected to begin floor action on H.R. 5297 until the week of July 19 at the earliest. Senate Majority Leader Harry Reid, D-Nev., has yet to determine which amendments will get floor votes, and he has accused Republicans of making his job difficult by offering amendments unrelated to small businesses. However, on July 14 Reid didn't rule out the possibility that senators could vote on the Lincoln-Kyl amendment, telling reporters, ‘We'll see.’”).
• Jay Heflin, Kyl seeks to add an estate tax fix to small-business bill, On the Money: The Hill’s Finance & Economy Blog, July 13, 2010 (“Senate Majority Leader Harry Reid (D-Nev.) has engaged a procedural maneuver called “filling the tree” that limits the number of amendments that can be offered on a particular bill.”).
• Carter Ruml, Breaking News – $5m Exemption and 35% Rate Sought As Amendment to Small Business Jobs Bill, KYEstates.com, July 14, 2010  (“It’s unclear whether the Lincoln-Kyl amendment is more than political theatre.”).
• Martin Vaughan, US Sens Kyl, Lincoln Seek Vote On Limiting Estate Tax, NASDAQ, July 14, 2010 (“The phase-in is a change from legislation Kyl and Lincoln have introduced in the past and is meant to make the short-term cost of the bill appear smaller. . . . In contrast to the Lincoln-Kyl proposal, U.S. President Barack Obama has proposed setting a 45% rate and a $3.5 million estate tax exemption amount.”).

[Updated 7/15/10 4:30 PM to correct typo - Sen. Kyl.]

Looking ahead: (1) H.R. 4213, (2) H.R. 5486, and (3) Sen. Kyl

There are a number of items to watch for this week:

[1] The Senate is scheduled to continue considering H.R. 4213, today at 3:00 PM.  See Two updates on H.R. 4213, American Jobs and Closing Tax Loopholes Act, June 11, 2010.  My posts on H.R. 4213 are being aggregated under the category IRA Charitable Rollover.  To learn more about IRA charitable rollovers, while being entertained, I highly recommend reading Conrad Teitell’s AVATAX, which he has generously shared.  See Conrad Teitell's enlightening and entertaining production, AVATAX -- Planned Giving on Planet PandIRA.

[2] Last week, Rep. Sander Levin introduce H.R. 5486, which would limit GRATs in an identical way to H.R. 4849 (which the House recently passed).  See On June 9, 2010, Rep. Sander Levin introduced another bill that would restrict GRATs – H.R. 5486.  H.R. 5486 could be voted on by the House very soon.  See Martin Vaughan- House to vote on a bill funded by restrictions on GRATs.  The JCT increased the estimated revenue that restricting GRATs would raise from $4.450 billion to $5.297 billion.  I was curious as to why this might happen and I received two thoughtful responses.  See How much revenue would limiting GRATs raise over 10 years- $4.450 billion (H.R. 4849) or $5.297 billion (H.R. 5486)? 

[3] Last week we learned that the resilient Senator Jon Kyl is “pretty close” to getting 60 votes to support his estate tax reform initiative.  See Sen. Kyl states he is pretty close to gathering the 60 votes needed to pass estate tax reform bill: 35% top rate, $5 million exemption. 

My sense is that this week [1] the Senate will definitely consider H.R. 4213 and will probably amend it in some way, [2] the House might vote on (and pass) H.R. 5486, and [3] Sen. Kyl will probably not gather the 60 votes he is seeking. 

On June 9, 2010, Rep. Sander Levin introduced another bill that would restrict GRATs – H.R. 5486

On June 9, 2010, Rep. Sander Levin [D-MI] introduced H.R. 5486, To amend the Internal Revenue Code of 1986 to provide tax incentives for small business job creation, and for other purposes.

This bill would make a number of non-estate tax reforms, intended to help small businesses.

Importantly, the bill would restrict grantor retained annuity trusts ("GRATs") to help pay for its reforms.

H.R. 5486 is not the first proposal by Rep. Sander Levin that would restrict GRATs. An earlier proposal, H.R.4849, was passed by the House and is being considered in the Senate.

As the comparison below shows, H.R. 4849 and H.R. 5486 would restrict GRATs in identical ways:

H.R.4849

H.R.5486

SEC. 307. REQUIRED MINIMUM 10-YEAR TERM, ETC., FOR GRANTOR RETAINED ANNUITY TRUSTS. (a) In General- Subsection (b) of section 2702 is amended-- (1) by redesignating paragraphs (1), (2) and (3) as subparagraphs (A), (B), and (C), respectively, and by moving such subparagraphs (as so redesignated) 2 ems to the right; (2) by striking `For purposes of' and inserting the following: `(1) IN GENERAL- For purposes of'; (3) by striking `paragraph (1) or (2)' in paragraph (1)(C) (as so redesignated) and inserting `subparagraph (A) or (B)'; and (4) by adding at the end the following new paragraph: `(2) ADDITIONAL REQUIREMENTS WITH RESPECT TO GRANTOR RETAINED ANNUITIES- For purposes of subsection (a), in the case of an interest described in paragraph (1)(A) (determined without regard to this paragraph) which is retained by the transferor, such interest shall be treated as described in such paragraph only if-- `(A) the right to receive the fixed amounts referred to in such paragraph is for a term of not less than 10 years, `(B) such fixed amounts, when determined on an annual basis, do not decrease relative to any prior year during the first 10 years of the term referred to in subparagraph (A), and `(C) the remainder interest has a value greater than zero determined as of the time of the transfer.'. (b) Effective Date- The amendments made by this section shall apply to transfers made after the date of the enactment of this Act.

SEC. 531. REQUIRED MINIMUM 10-YEAR TERM, ETC., FOR GRANTOR RETAINED ANNUITY TRUSTS. (a) In General- Subsection (b) of section 2702 is amended-- (1) by redesignating paragraphs (1), (2) and (3) as subparagraphs (A), (B), and (C), respectively, and by moving such subparagraphs (as so redesignated) 2 ems to the right; (2) by striking `For purposes of' and inserting the following: `(1) IN GENERAL- For purposes of'; (3) by striking `paragraph (1) or (2)' in paragraph (1)(C) (as so redesignated) and inserting `subparagraph (A) or (B)'; and (4) by adding at the end the following new paragraph: `(2) ADDITIONAL REQUIREMENTS WITH RESPECT TO GRANTOR RETAINED ANNUITIES- For purposes of subsection (a), in the case of an interest described in paragraph (1)(A) (determined without regard to this paragraph) which is retained by the transferor, such interest shall be treated as described in such paragraph only if-- `(A) the right to receive the fixed amounts referred to in such paragraph is for a term of not less than 10 years, `(B) such fixed amounts, when determined on an annual basis, do not decrease relative to any prior year during the first 10 years of the term referred to in subparagraph (A), and `(C) the remainder interest has a value greater than zero determined as of the time of the transfer.'. (b) Effective Date- The amendments made by this section shall apply to transfers made after the date of the enactment of this Act.

A June 9, 2010 Wall Street Journal article, by Martin Vaughan, informs that H.R. 5486 could be voted on by the House soon.

For more on the proposals to restrict GRATs, see my earlier posts.

[Last updated on June 12, 2010 at 3:47 PM.]

Martin Vaughan: House to vote on a bill funded by restrictions on GRATs

On June 9, 2010, the Wall Street Journal published House Readies Bill to Zero Out Capital-Gains Taxes on Small Firms, by Martin Vaughan.

Vaughan reports that the House might be voting on a bill that would fund non-estate tax reforms through restrictions on grantor retained annuity trusts: 

A bill to eliminate capital-gains taxes on many investments in small businesses could come to the House floor as early as Thursday.

The bill builds off of proposals from President Barack Obama aimed at giving small businesses more access to capital so they can hire workers and invest. It also would establish a $30 billion lending facility managed by the Treasury Department. . . .

That cost will be offset so the bill will not worsen the deficit. The bill will raise money through an Obama proposal to curb the use of grantor-retained annuity trusts by the wealthy to avoid estate taxes. It would also shut down the use of a cellulosic biofuels tax credit by the paper industry.

Vaughan does not provide the name or the number of the bill.  I will post again very shortly on the likely bill.

(Special thanks to Michael Hepner, a benefits professional, for bringing this article to my attention.)

Senators could not agree to gradually reduce the federal estate tax rate to 35% and raise the exemption to $5 million

The news.

A number of articles have reported that Senators have reached no agreement on the federal estate tax. 

In Kyl: Senate deal off on estate tax (On the Money: The Hill’s Finance & Economy Blog, 5/18/10), Vicki Needham reports the following:

Senate Minority Whip Jon Kyl (R-Ariz.) said the accord, which was all but forged a week ago, began to dissolve Monday night and broke down Tuesday after talks between leaders in both parties.

After talks with Senate Finance Chairman Max Baucus (D-Mont.) and Senate Minority Leader Mitch McConnell (R-Ky.), they scrapped a plan to move forward with the tax that expired at the end of 2009.

In US Senate Effort to Reduce Estate Tax Hits Turbulence (Dow Jones Newswires, 5/18/10), Martin Vaughan reports:

[I]n a closed-door meeting of Senate Democrats Tuesday, several senators denounced the plan in strong terms, according to those present. They argued that with problem budget deficits and with many Americans still out of work, it is the wrong time to cut taxes on the richest Americans.

In their own words.

Here are few quotes from senators:

• Senate Minority Whip Jon Kyle [R-AZ]:
  • “Nothing is clear about how the estate tax will be considered.” (Source: Martin Vaughan, US Senate Effort to Reduce Estate Tax Hits Turbulence)
  • “We no longer have an agreement because the Democratic side has decided that unless a matter has a guaranteed majority of Democratic votes going in, they’re not going to allow it on the floor, at least not voluntarily. . . . So we have to find a way to get a reasonable permanent estate tax reform to the floor where members can vote on it.”  (Source: Vicki Needham, Kyl: Senate deal off on estate tax.) (You can hear Sen. Kyle speak the first sentence at Republican Kyl Says Democrats Are Blocking His Estate Tax Amendment, Talk Radio News Service, May 18, 2010.)
• Senate Finance Committee Chairman Max Baucus [D-MT]: “There’s no agreement on estate tax, neither on substance nor on process.  None whatsoever.”  (Source: Martin Vaughan, US Senate Effort to Reduce Estate Tax Hits Turbulence.)
• Senator Robert P. Casey, Jr. [D-PA]: “The idea that we’re going to give an incredible economic advantage to less than 1 percent of our taxpaying population is really offensive to me. . . . Most of our caucus is very concerned with what would happen on the estate tax.” (Source: Sam Goldfarb, No Deal Yet on Estate Tax, Baucus Says, Tax Notes Today, May 18, 2010, 2010 TNT 96-5.)
• Senator Bernard Sanders [D-VT]: “The idea that we would make significant exemptions within the estate tax to give more tax breaks to the top three-tenths of 1% is nauseating.  I will do everything I can to stop that.”  (Source: Martin Vaughan, US Senate Effort to Reduce Estate Tax Hits Turbulence.)

Notes on the proposed deal.

Although the details of the proposed deal have not been disclosed, here are some notes, which are compiled from various news articles:

• Tax cuts. Tax cuts would be phased-in over ten years: the rate would go down 35% and the exemption up to $5 million, indexed for inflation.  (Martin Vaughan, US Senate Effort to Reduce Estate Tax Hits Turbulence.)
• Prepaying the estate tax.There have been talks about giving individuals the option of prepaying the estate tax through pre-paid trusts.  Individuals who pre-pay would benefit from a lower rate.  (Id.)
• Budget offsets.  Lawmakers were searching for budget offsets within the estate tax.  The offsets would (1) help to prevent a higher deficit, and (2) prevent “dipping into other revenue streams” (Meg Shreve, Lobbyists Say Lawmakers Looking for $60 Billion in Offsets for Estate Tax Bill, Tax Notes Today, May 17, 2010, 2010 TNT 94-4). 
• No credit for state estate taxes.  The federal tax credit for state estate taxes would continue to be repealed.
• Limits on GRATs.  Limits on the use of GRATs were being considered.   
• Pay-as-you-go.  The proposal could comply with pay-as-you-go rules.  “Budgeting rules dictate that the 2009 estate tax levels can be extended for two years without revenue offsets, but additional revenue loss must be offset.  Senators can waive the offset rule, however, with a 60-vote supermajority.”  (Eric Kroh, Kyl Says Agreement Reached on Some Estate Tax Details, Tax Notes Today, May 18, 2010, 2010 TNT 95-2.) 

A number of issues were not clarified in the articles that I read:

• the gift tax rate and exemption
• whether any changes would be retroactive 

Also, there is no indication that portability of the exemption amount between spouses was discussed.

Status of the reform.

Estate tax uncertainty continues.  Reform is hampered by a deep divide between democrats and republicans:  

• House.  As indicated in the voting for H.R. 4154, most Democrats in the House supported a permanent estate tax with an exemption of $3.5 million and a tax rate of 45%.  Republicans in the House did not.
• Senate. As the current talks indicate, some Republicans (and some Democrats) would support a lower estate tax rate (down to 35%) and a higher exemption (up to $5 million).  Yet some Democrats vehemently oppose such a tax reduction.  At least one Democrat in the Senate finds the idea “nauseating.”

IRS is "taking a wait-and-see approach" with regards to the federal estate tax

In February 5, 2010 article -- IRS Silent So Far On New US Tax Rules For Inherited Wealth -- Martin Vaughan writes, "The U.S. Internal Revenue Service is taking a wait-and-see approach on issuing guidance dealing with taxes on inherited wealth, unsure whether Congress will act in the next several months to change the rules again."

Many advisers to the wealthy are taking a similar approach, but Vaughan reports that some "are looking to IRS for rules on how a new capital gains-tax regime that took effect this year will apply to estates."

The wait-and-see approach that practitioners and the IRS are taking probably stems from a belief that Congress will reinstate the federal estate tax retroactive to January 1, 2010.  I have spoken with a number of practitioners who are almost certain that Congress will take such action.  But there can be little certainty when Congress surprised everyone by failing to act by the end of 2009. 

TaxProf Blog also reported on Vaughan's article: IRS Silent Amidst Estate Tax Chaos (2/7/09).  A humorous comment by a person named Woody asks, "Is that 'dead' silence?" 

Will the forthcoming Senate jobs bill also fix the federal estate tax?

Reporting on the Senate jobs bill that is expected to reach the Senate floor next week, Martin Vaughan writes about how the federal estate tax is being used by some senators as a negotiating tool:

One looming issue that Senate leaders will have to deal with are possible amendments on the estate tax, which a bipartisan group is trying to negotiate a compromise on. Some Democratic and Republican senators might seek a commitment from [Senate Majority Leader Harry] Reid to take up estate tax legislation later in the year, in exchange for agreeing not to offer estate-tax related legislation as an amendment to the jobs bill.

Senate Jobs Bill Takes Shape As Leaders Push Vote Next Week (NASDAQ, 2/4/10).