“Nothing Is Certain Except Death and Taxes”
In 1789, Benjamin Franklin said, “In this world, nothing can be said to be certain, except death and taxes.”
Legendary economist Adam Smith espoused four canons of a fair tax system. One of those canons was “certainty.”
Current law calls for the Federal Estate Tax to “disappear” or be temporarily repealed in 2010 and then rise again in 2011 at higher tax rates and with a substantially lower unified exemption credit, commonly known as the estate tax exemption, equivalent of $1 million. It also calls for “carryover basis rules” to be imposed for inherited property.
Thus, there is a great deal of uncertainty regarding the tax fate of the American taxpayer who dies in 2010. It is certain that we will have new tax legislation before the end of 2009, as Congress is not likely to let the Federal Estate Tax be repealed, even on a temporary basis.
The Certain Estate Tax Relief Act of 2009, H.R. 436 proposes: (1) to provide for a $3.5 million estate tax exclusion, (2) to impose a maximum estate tax rate of 45% , (3) to provide for a phaseout of graduated estate tax rates and the unified credit against the estate tax for estates exceeding $10 million, (4) no valuation discounts for certain transfers of non-business assets, (5) to limit estate tax discounts for certain individuals with minority interests in a business, and (6) to repeal the “carryover basis rules” for inherited property.
Discounting the valuation of assets and interests in entities commonly called family limited partnerships is currently a major planning opportunity to reduce federal estate taxes.
This proposed legislation would not allow valuation discounts for non-business assets transferred to an entity, such as a family limited partnership. A “non-business” asset is one not used in the active conduct of a trade or business. Further, the proposed legislation would eliminate minority discounts currently allowed for owning less than a controlling interest in an entity. The proposed effective date for transfers to family limited partnerships and similar entities is after the date of enactment.
Additional legislation, the Taxpayer Certainty and Relief Act of 2009, proposes estate tax changes as well as income tax changes and alternative minimum tax changes. Proposals include:
- Make permanent the 2009 estate tax exemption of $3.5 million for an individual for 2010 and beyond. The gift tax and the generation-skipping transfer tax exemption would be unified with the estate tax. The exemptions for a couple would be double these amounts. For example, the estate tax exemption for a married couple would be $7 million.
- Inflation indexing of the estate tax exemption, generation-skipping tax exemption, and gift tax exemption in $10,000 increments beginning in 2011.
- The top estate tax rate would be fixed at 45% as under current law.
- The “portability” of the unused portion of the estate tax exemption of a deceased spouse to a surviving spouse. A husband and wife each have a $3.5 million estate tax exemption. Any unused portion of the $3.5 million estate tax exemption from the first to die would be “portable” by election and used by the surviving spouse in addition to his or her $3.5 million estate tax exemption.
- An increase in the special use valuation method for certain farms and small businesses to equal the estate tax exemption of $3.5 million effective after December 31, 2009.
To that old saying “nothing is certain but death and taxes,” add the new Federal Estate Tax legislation of 2009.
— Joseph W. Walloch
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Joseph W. Walloch is a CPA in Redlands, California. Joe holds a master’s degree in taxation and was recently named one of the “Top 50 Tax Professionals in America” by CPA Magazine. He recently received the 2008 AICPA Tax Division Award for Exemplary Public Service. He can be reached through his Web site: www.walloch.com.
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