Washington Hotline

WASHINGTON HOTLINE

Senate Budget Plan Includes Estate Tax

Tax Quote of the Week

“When you listen to tax-cut rhetoric, remember that giving one class of taxpayers a ‘break’ requires – now or down the line – that an equivalent burden be imposed on other parties. In other words, if I get a break, someone else pays. Government can’t deliver a free lunch to the country as a whole. It can however, determine who pays for lunch.”

– Warren Buffett

Senate Budget Plan Includes Estate Tax

On April 22, 2010, the Senate Budget Committee passed the Democratic budget plan for fiscal year 2011. Sen. Budget Chair Kent Conrad (D-ND) was very pleased with the passage. He noted that the five year plan should bring the deficit down to 3% of the gross domestic product by 2015.

Sen. Conrad stated, “This plan is fiscally-disciplined when it comes to spending. It freezes non-security discretionary spending for three years and enforces those levels with spending caps. It cuts discretionary spending by $4 billion below the President’s requested levels.”

The budget also makes provision for potential deficit reductions by the President’s Bipartisan Fiscal Commission. The Fiscal Commission will hold its first meeting on April 27, 2010. Any deficit reductions achieved as a result of Fiscal Commission efforts will be used to reduce the federal deficit and will not be permitted to increase spending.

Sen. Judd Gregg (R-NH) is the Ranking Member of the Senate Budget Committee. He was disappointed with the budget. Sen. Gregg noted, “Despite massive deficits and debt as far as the eye can see, this budget fails to make any progress on getting the government’s spending and borrowing spree under control. It fails to effectively restrain spending, finding only $4 billion in cuts in a $3 trillion budget, a comparative drop in the bucket.”

Under the proposed Senate budget, the tax cuts enacted in 2001 and 2003 would be continued for individuals in the four lower brackets. However, the 33% bracket will be increased to 36% and the 35% top bracket will be stepped up to 39.6%.

Capital gains tax rates will increase from 15% to 20%. The estate tax is assumed to be extended based on the 2009 exemption of $3.5 million per person. The Senate budget projects that the estate tax will be extended at that level for the years 2010 and 2011.

ABA Requests Senate Finance Hearing on Estate Taxes

Stuart M. Lewis and Roger D. Winston of the American Bar Association Sections on Taxation and Real Property, Trusts and Estate Law sent a letter to Sen. Finance Chair Max Baucus (D-MT) on April 15, 2010. Lewis and Winston requested a Senate hearing on “the significant issues” resulting from the temporary repeal of the estate tax.

In the letter they observed that there are four major issues that are causing huge problems in the estate planning community. Lewis and Winston hope that a hearing before the Senate Finance Committee could encourage Congress and the IRS to resolve these issues. The issues are as follows:

1. Carry-over Basis in 2010 – Because many estate planners did not anticipate carry-over basis would actually take effect, there has been very minimal preparation in understanding and interpreting the carry-over basis rules.

2. 2010 Estates – For individuals who pass away in 2010, many formula clauses are based on an assumed estate tax exemption. With no estate exemption, there may be many unintended problems and a significant level of accidental disinheritances. Fifteen states have proposed legislation to resolve this issue, but the diversity of estate formula clauses makes legislative reform very difficult.

3. 2010 Estate Tax Gap – There could be future tax problems if the estate tax repeal holds for 2010. In particular, some generation skipping transfer tax trusts created in 2010 will extend far into the future. There is great uncertainty about their potential transfer tax taxation.

4. Legislative Uncertainty – Even if Congress passes an estate tax retroactive to January 1, 2010, it may be years before the Supreme Court rules on the validity of that retroactive law. This uncertainty will continue to cause major estate administration problems.

Therefore, Mr. Lewis and Mr. Winston, on behalf of the American Bar Association, request a hearing on estate taxes by the Senate Finance Committee.

Editor’s Note: With the current press of Congressional business and reelection campaigns gearing up to launch in September, it is now very possible that the Senate will not consider action on estate taxes until after the November election. If legislation is passed in December, it still could be retroactive to January 1, 2010.