Late Thursday the House passed the Senate tax bill as is and sent it off to the President for signature. As expected the House did take a vote on an amendment to lower to the estate tax exemption, among other changes, to $3.5M. That amendment failed to pass; the vote was 194 to 233. A wise move because it would have been a waste of time. The Republicans in the Senate would have blocked passage of an amended version, and the Democrats would have blinked first and capitulated in the long run.
Now what do we do? For me as an estate planning attorney I will now need to advise my existing clients on what to do now. First, I need to learn the real details and think through the implications. With one major exception, I doubt I will change my advice to clients. The reason is the change is only temporary. Hence, I will likely continue to advise a married couple with over only $1.5M in assets to still do an “A-B” trust. The reason is if Congress does nothing, although unlikely, on January 1, 2013 (Just before President Huckabee is inaugurated, but that is to discuss another time) we will go back to a $1M estate tax exemption. I use $1.5M to recognize the odds of an increase. I have a disclaimer trust provision in my simple trusts for a couple to handle folks between $1M and $1.5M.
The one exception is I am going to advise my wealthy clients to give away the $5M now to their children. Although that may end up as only a delay in paying tax, as a an estate tax because of the gross up of gifts if we go back to a $1M estate tax exemption, we will still get the appreciation on such assets out of their estate. Note: I need to research but for now believe giving that $5M to grandchildren or a generation skipping trust would be risky because quite frankly I do not know if there is a gross up re generation skipping transfers at death.
Following is the summary of the transfer tax provisions from the Senate Finance Committee staff:
Temporary estate, gift and generation skipping transfer tax relief. The EGTRRA phased-out the estate and generation-skipping transfer taxes so that they were fully repealed in 2010, and lowered the gift tax rate to 35 percent and increased the gift tax exemption to $1 million for 2010. The proposal sets the exemption at $5 million per person and $10 million per couple and a top tax rate of 35 percent for the estate, gift, and generation skipping transfer taxes for two years, through 2012. The exemption amount is indexed beginning in 2012. The proposal is effective January 1, 2010, but allows an election to choose no estate tax and modified carryover basis for estates arising on or after January 1, 2010 and before January 1, 2011. The proposal sets a $5 million generation-skipping transfer tax exemption and zero percent rate for the 2010 year.
Portability of unused exemption. Under current law, couples have to do complicated estate planning to claim their entire exemption (currently $7 million for a couple). The proposal allows the executor of a deceased spouse’s estate to transfer any unused exemption to the surviving spouse without such planning. The proposal is effective for estates of decedents dying after December 31, 2010.
Reunification. Prior to the EGTRRA, the estate and gift taxes were unified, creating a single graduated rate schedule for both. That single lifetime exemption could be used for gifts and/or bequests. The EGTRRA decoupled these systems. The proposal reunifies the estate and gift taxes. The proposal is effective for gifts made after December 31, 2010.
This is quite a Republican victory. These exact provisions were voted down when proposed by Senator Kyl earlier in the year. Politico.com quotes a senior House Republican aide:
OK for the curious, the one or two of you out of over probably 700 who will see this post who is interested: Obama is toast. Quite simply the economy will not have recovered enough by Nov. 2012 for him to be re-elected. The Republican fight will be among Palin, Romney and Huckabee; the others such as Pawlenty do not have the name recognition. My choice would be Eric Cantor, young, very bright, charismatic, very articulate, pretty good political beliefs (although be honest Eric, we cannot afford all these tax cuts) but he is also unknown.
Because of the many winner take all primaries, Palin will come scaryingly close to getting the nomination. However, she is unelectable (40 percent of the electorate loves her, but 50 percent dislikes her, immensely); given a choice the voters would choose Obama over her (“I can see Russia from my house.”) Romney is a good man but will suffer from the anti-Mormon bias of many, especially evangelicals; also many voters will be unnerved by his changes on the issues and by the similarities between Obamacare and Romneycare. Huckabee is a good and great man. Heard him speak on Prop 8 in October 2008; a marvelous speaker and you can see the goodness in his eyes. He and Palin will split the evangelical vote. We will finally have a national convention go beyond the first ballot. The Palin delegates will then finally turn to Huckabee over Romney. Huckabee will beat Pres. Obama. You heard it first here.
We shall see.
By Kevin Staker