Estate and Gift Tax Bill Introduced in House

Pending Legislation

On November 17, 2011, Congressman Jim McDermott (D-WA), a senior member of the House Ways and Means Committee, introduced HR 3467, the “Sensible Estate Tax Act of 2011”.   Along with changes to the estate tax, the bill includes many of Obama’s 2012 Fiscal Year Proposals with regard to gift and GST taxes. The bill includes the following:
Estate Tax Exclusion Amount of $1,000,000 with Top Rate of 55%:
Reduction of the estate tax exclusion amount to $1 million for decedents dying after December 31, 2011, and indexing for inflation from the year 2000 for decedents dying after 2012. The top tax rate is 55%, and the graduated amounts subject to the rate schedule would also be indexed for inflation.
Provisions designed to coordinate with the gift tax to reflect the decrease in the applicable exclusion amount.
Permanent Spousal Portability of the Estate Tax Exclusion Amount:
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “2010 Act”) created portability of the estate tax exemption between spouses, but the law expires on December 31, 2012.   The Bill makes portability permanent.
Also included is a technical correction in the definition of “deceased spousal unused exclusion amount (“DSUEA”)” of a surviving spouse.  The reference to the basic exclusion amount of the last deceased spouse of the surviving spouse would be replaced with a reference to the applicable exclusion amount of the last deceased spouse, so that the statute would reflect the calculation of the DSUEA as described by the Joint Committee on Taxation.
Credit for State Death Taxes Restored:
The credit was phased out from 2002 to 2005. Before, many states had estate tax laws that permitted them to “pick up” the amounts allowable as a federal estate tax credit. Thus states could share in the estate tax collections without increasing the overall estate tax burden.  The bill would restore the revenue sharing mechanism with the states.
Valuation Discounts and Minority Interest Discounts Limited:
Valuation discount limitations for certain transfers of nonbusiness assets (defined as an asset which is not used in the active conduct of one or more trades or businesses), including:
  • For the transfer of an interest in an entity which is not actively traded, no valuation discount would be allowed with respect to “nonbusiness assets”;
  • For the transfer of an interest in an entity which is not actively traded, no discount would be allowed by reason of the fact that the transferee does not have control of the entity if the transferee and the transferee’s family members have control of the entity.
  • Effective with regard to transfers after the date of enactment.
Consistency in Value For Transfer and Income Tax Purposes Would be Required :
Imposition of a consistency and a reporting requirement, with penalties for inconsistent basis reporting. The basis of property acquired from a decedent pursuant to Internal Revenue Code (“IRC”) Section 1014 must equal the value of that property for estate tax purposes, and the basis of property received by gift must equal the donor’s basis determined under IRC Section 1015.
Effective for transfers for which returns are filed after the date of enactment.
Restrictions on Grantor Retained Annuity Trusts :
  • Minimum 10 year term;
  • Annuity payment cannot be reduced from one year to the next during the first 10 years of the GRAT term; and
  • The remainder interest at the time of the transfer must have “a value greater than zero.’’
  • The bill contains no guidance regarding the parameters of the  “greater than zero” requirement.
  • Effective for transfers made after the date of enactment.
Duration of Generation-Skipping Transfer Tax Exemption Limited:
Expiration of the GST exemption 90 years after the establishment of a trust. This is done by increasing to one the inclusion ratio with respect to property transferred after that date.
Applies to trusts created after enactment, and to transfers made from pre-existing trusts if the transfer is made out of principal added to the trust after the date of enactment (subject to grandfathering exceptions).
My view is the that Bill has no chance of passage in its current form, the main sticking point being the drastic reduction of the current estate tax exemption and increase of the rate.
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