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 can exempt $3.5 million from taxes (up to $7 million for married couples who have engaged in proper estate tax planning) with amounts above the exemption taxed at a 45 percent rate.
This is, in essence, the House version of the estate tax legislation. The Senate version would have been more generous to wealthy taxpayers. Under the Senate version, the estate tax exemption would have increased to $5 million per individual ($10 million for a married couple) and would have lowered the tax rate to 35 percent. The Senate voted 51-48 for the amendment.
Under a prior House bill, the estate tax exemption would have been lowered to $2 million with a top federal rate of 55 percent. Sources close to the conference committee seem to believe that the $3.5 million exemption amount agreed to will be indexed to inflation. That would be good news for wealthy taxpayers.
One of the most contentious issues surrounding the estate tax debate centers on whether unused estate tax exemption would be “portable” for married couples. In other words, if a married person dies but all of his or her assets are in joint name, or if a majority of assets were in the surviving spouse’s name, can the surviving spouse use the deceased spouse’s unused exemption to shield assets from the estate tax? Under the current law this is not possible.
In order for a married couple to use both of their exemptions from the federal estate tax, they must divide their assets and have proper estate tax planning embedded within their revocable living trusts or wills. This poses a problem for couples who do not wish to divide their assets during their lifetimes.
In the case of a couple where one of the individuals is engaged in a high risk profession, for example, dividing assets could result in exposing the high risk spouse’s assets to the claims of that individual’s creditors. A physician, for example, doesn’t want to divide her assets from her spouse’s assets and place them into her name alone. Any malpractice claimant who obtains a judgment in excess of insurance coverage could make a claim on those individual assets.
Individuals who are in second marriage situations may not wish to place assets into their spouse’s individual name where they each have children from a prior marriage and therefore have different beneficiaries. By dividing and balancing assets to achieve the maximum estate tax exemption could result in the wealthier spouse’s children losing a portion of their inheritance.
In my view portability would open up many planning opportunities for a variety of different circumstances, and reduce the chance that someone’s estate would one day be subject to estate tax. There are many complicated issues that the law must address, however. An example of such an issue would be portability for an individual who has been in multiple marriages. Would that individual be limited from how many different spouses he or she could gain estate tax exemption?
Another issue arises with lifetime gifts. Today, despite a $3.5 million exemption, each of us is limited to $1 million of lifetime taxable transfers. Should anyone make transfers above said amount then one actually pays gift tax. This inhibits advanced estate planning techniques.
So we’ll wait to see what kind of bill arrives for a full Congressional vote, and whether the President intends to sign such legislation. As always, stay tuned to this column or check on my “Family Legacy Blog” on my website, www.sbshlaw.com/blog.
©2009 Craig R. Hersch