In 2009, the exempt
amount increases to $3.5 million. In 2010, the estate tax is fully
repealed. However, the estate tax repeal lasts only one year and in 2011
the tax is scheduled to return to its previous level before Bush was
elected.
The bizarre “off
then on” aspect of the current law has made estate tax planning
difficult for individuals with estates in excess of $1 million.
In addition, the repeal called for under the 2001 law would
actually raise income taxes on many
heirs by changing the rules for a step-up in tax basis on inherited
assets.
Each year since 2001,
the House has voted for a permanent total repeal of the estate tax. But
total repeal has been rejected in the Senate as a result of Democratic
opposition to abolishing the tax on the largest estates. Since the House
would accept no less than total repeal, nothing has been accomplished for
five years.
This year House
Republican lawmakers, fearing losses in the upcoming election, have
finally abandoned their “all or nothing” stance and accepted the need
for compromise reform. To that
end, HR 5638 was passed by the House on
June 22, 2006
.
The bill would exempt
small estates of up to $5 million -- or $10 million for couples – from
any tax. Estates valued at between $10 and $25 million would pay a tax
rate of 15 percent - the same as the current rate on capital gains.
Estates larger than $25 million would pay a tax rate that is double the
capital gains rate. The
negative change in the step-up in basis rules would not occur.
If the proposed
changes are enacted, the estate tax is expected to affect only the
wealthiest 0.3% of decedents - fewer than 3,000 families each year. (Under
current law, 12,600 estates -- approximately 1 percent of all people who
die -- will be subject to the tax this year). Cost of the partial repeal
is estimated at more than $60 billion a year by 2011.
The measure is now
dependent upon the Senate. It
is expected that Majority Leader Frist will bring the measure to the
flo
or only when he believes he has the votes for passage.
In order to woo additional timber state Senators to vote for the
bill, tax breaks for the timber industry have been added. The measure
could come to a Senate vote in the near future, although a vote is more
likely later this summer. President
Bush would likely sign the measure.
Here
is a summary of the major features of the legislation passed by the House,
HR 5638, which is referred to as the Permanent Estate Tax Relief Act of
2006 (PETRA).
Increased
Estate and Gift Tax Exemption
•
PETRA
would
increase the exemption amount to $5 million per person (indexed for
inflation) effective
January 1, 2010
.
Lower
Estate and Gift Tax Rates
•
PETRA
would reduce the rate of tax on estates up
to $25 million to the capital gains tax rate (currently 15 percent, set to
increase to 20 percent in 2011 unless extended).
•
The bill would reduce the rate of tax on estates of $25 million or more to
twice the capital gains rate (currently 30 percent, set to increase to 40
percent in 2011 unless extended).
Portable
Spousal Estate and Gift Tax Exclusion Amount
•
PETRA
would allow married couples to take full
advantage of the $5 million exemption (indexed for inflation) by carrying
over any unused exemption to the surviving spouse.
Guarantees
“Stepped-Up” Basis
•
PETRA
maintains “stepped-up” basis for
property acquired from a decedent by repealing the modified carryover
basis rules under the 2001 tax law that would have gone into effect in
2010.
Tim
ber Tax Provision
•
A timber provision creates a new 60 percent deduction for qualified timber
capital gains.
The
text of the legislation is available online at
http://waysandmeans.house.gov/media/pdf/taxdocs/5638text.pdf
Jeff Marshall is
Certified as an Elder Law Attorney by the National Elder Law Foundation
and is the author of Elder Law in Pennsylvania. He is the managing
attorney of the Elder Law Firm of Marshall & Associates with offices
in
Jersey
Shore, Williamsport
and
Wilkes-Barre.. He can be contacted at
webmail@paelderlaw.com.
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