Permanent Estate Tax Relief Act of 2006
By Richard W. Nenno
In yet another development in the ever-changing estate tax saga, on June 19, Congressman William M. Thomas, R-Calif., chairman of the House Ways and Mean Committee, introduced H.R. 5638 – the Permanent Estate Tax Relief Act of 2006 (PETRA). Although PETRA’s fate is uncertain, Chairman Thomas’ action is significant because, until now, the Republican House leadership has refused to consider anything except total repeal of the death tax.
If enacted, the bill would be effective Jan. 1, 2010. H.R. 5638 includes an elimination of the one-year repeal of estate and generation-skipping transfer (GST) taxes that is scheduled for 2010, and considerably reduces estate, gift and GST tax rates and substantially increases exemptions from these taxes.
H.R. 5638 includes the following important features:
• Estate/Gift/GST Taxes Unified: Exemption Estate Tax – $5 million (indexed for inflation Gift Tax –(starting 2011)
GST Tax – $5 million (indexed for inflation starting in 2011)
Estate Tax – $5 million to $25 million, equal to long-term capital gain tax rate, presently 15 percent (scheduled to increase to 20 percent in 2011); over $25 million, twice the long-term capital gain tax rate, presently 30 percent (scheduled to increase to 40 percent in 2011)
Gift Tax – Same as estate tax
GST Tax – Same as estate tax
• Stepped-Up Income-Tax Basis at Death: Retained – no carry-over basis
• Portable Spousal Estate/Gift Tax Exemption:
Surviving spouse may use unused portion of deceased spouse’s exemption
• State Death/GST Tax Credits: Not restored; state death tax deduction repealed
So, repeal of the death tax seems to be dead – except for 2010 if no legislation is enacted.
Now that the Republican House leadership is willing to consider amendment of – not just repeal of – the transfer tax system, something actually might happen. The Senate might consider PETRA at any time. Carpe diem!
It has been suggested that, if PETRA becomes law, individuals will engage in a flurry of estate planning activity before 2009 to take advantage of PETRA’s favorable features for fear that the Democrats will take over the shop in the 2008 election and undo the revisions. This is not accurate because PETRA’s provisions won’t take effect until 2010. Also, unless the Democrats have at least 60 Senate seats, the Republicans will be able to prevent passage as the Democrats have done in the past.
ESTATE PLANNING CONSIDERATIONS
PETRA’s portable spousal exemption is a significant feature and addresses the problem estate planners face when one spouse has more assets than the other. When the wealthier spouse is not willing or able to transfer assets to the poorer spouse (e.g. because a retirement plan is the largest asset), estate planners agonize over how to enable both spouses to use their exemptions fully. This proposal would relieve much of that angst.
In addition, because the state death/GST tax credits will not return, the states will continue to have “decoupled” (i.e. separate) inheritance/estate taxes to cover the revenue that they once received through the federal credits. Individuals must plan with this in mind.
Because it appears increasingly likely that the estate and GST tax credits will not go away, individuals should employ the usual tax-saving techniques, such as making gifts, creating dynasty trusts and other irrevocable trust entities, or using family limited partnerships, limited liability companies, and similar entities in appropriate situations. It’s also important to continue to create trusts for non-tax reasons, such as to attain personal objectives or for asset management and asset protection purposes.
For many reasons, the next several years should continue to see volatility in U.S. tax laws. At the moment, it is unclear whether PETRA and a “sweetener” included in it will attract enough Senate votes for passage. So what actually will happen in Washington remains anyone’s guess.
Richard W. Nenno (email@example.com) is managing director and trust counsel of wealth advisory services for Wilmington Trust Corp. He is a graduate of Princeton University and Harvard Law School, was past chairman of the Estates and Trusts Section of the Delaware State Bar Association and was a past president of the Estate Planning Council of Delaware Inc.