Since 2001 we have been waiting for the other shoe to drop - the enactment of a new federal estate tax law. Last week the House of Representatives dropped the other shoe, but the Senate may give it the boot.
The House of Representatives, by a vote of 225 to 200, passed the Permanent Estate Tax Relief for Families, Farmers, and Small Business Act of 2009. This act provides that the estate tax exemption stays at $3,500,000, and the top rate of 45 percent stays in effect.
The Act also continues the present system under which the basis (tax cost) of a decedent's assets steps-up to market value as of the date of death. Under the existing law, in 2010 the estate tax would be repealed, but the basis of assets a decedent owned would carry over to the recipients of those assets. If carry-over basis were to become law, the result would be chaos, since determining basis of assets bought years or decades earlier by a decedent would be almost impossible.
The Act now goes to the Senate, where it may be defeated or severely changed. Some senators want other provisions, such as raising the exemption to $5,000,000, indexing the exemption to inflation, and lowering the top rate to 35 percent. There is also talk about portability of the exemption.
Estate planning for married clients often involves using the exemption amount (now $3,500,000) to protect assets in the "family" or "bypass" trust from taxation. If the exemption is not used, it is lost - portability would enable the surviving spouse to use that part of the exemption not used by the deceased spouse.
For instance, one spouse could leave all of his or her assets to the other spouse, using no part of the exemption. The surviving spouse could then use his or her exemption plus the deceased spouse's unused exemption - a total of $7,000,000 under present law.
We may not have an estate tax bill until next year, because the Senate is busy with the new healthcare bill, which was reported out of the House with 1990 pages and nearly 400,000 words. We will keep you posted, here and on our website, as the estate tax bill moves along.
