April 7, 2008
On April 3, 2008, Chairman Max Baucus (D-MT) led the Senate Finance Committee in a hearing devoted to areas of reform in the estate, gift, and generation-skipping transfer tax system. This was the third hearing that the Senate Finance Committee has held on estate tax reform. The first hearing was on November 14, 2007 during which four separate individuals (an Iowa manufacturer, a Nevada rancher, Warren Buffet, and estate planning attorney, Conrad Teitell) presented their views on reform or repeal. At the second hearing on March 12, 2008, the Committee heard from three academics on possible alternatives to an estate tax. During the April hearing, the Committee heard from four individuals knowledgeable in the field with proposals for changes to the federal wealth transfer tax system. Testifying were: Dennis I. Belcher (Partner, McGuireWoods LLP), Shirley L. Kovar (Shareholder, Branton & Wilson, APC, San Diego, California), Dr. Roby B. Sawyers (North Carolina State University, Department of Accounting, Raleigh, NC), and Diana Aviv (President and Chief Executive Officer, Independent Sector, Washington, DC). Having heard in March about alternatives to the federal wealth transfer tax system, the Committee looked to the experts on the panel for reform ideas to provide efficiency and simplicity for tax payers and tax planners.
Dennis Belcher proposed several changes to the installment payment provisions provided for under section 6166 of the Internal Revenue Code. The installment payment provisions provide for deferral of estate tax liability attributable to closely held business interests in a decedent's gross estate. Because of the illiquid nature of many closely held businesses, the installment payment provisions allow a decedent's family to continue to operate the family enterprise - either to generate the cash needed to pay the tax in installments or to position the company for sale to maximize the value of the decedent's business. Belcher identified several complications with the operation and interpretation of the installment payment provisions. His recommendations included:
Shirley Kovar, speaking as a practitioner and on behalf of the American College of Trust and Estate Counsel, encouraged the Committee to adopt a plan for portability of the estate, gift, and generation-skipping transfer tax exemptions. Portability of the exemptions would allow husband and wife, in effect, to combine exemption amounts by transferring a deceased spouse's unused exemption amount to a surviving spouse. Under the current wealth transfer tax regime, taxpayers make use of a "credit-shelter" trust to ensure that husband and wife maximize the use of the estate tax exclusion amount. Kovar suggested in her testimony that this technique - funding two trusts, one with the exemption amount and one with the rest of the estate assets, often with identical provisions - is a step that few estate planning clients would request except for the need to make efficient use of the estate tax exemption amounts. The reasons presented to the Committee for adopting the Portability regime include the following:
Dr. Roby Sawyers laid out to the Committee the case for the reunification of the estate and gift tax exemptions. Raising the lifetime gift tax exemption (currently, $1,000,000) to equal the estate tax exclusion amount ($2,000,000 for 2008 and increasing to $3,500,000 in 2009) has the following benefits:
Ms. Aviv called on the Committee to address abuses in the charitable giving area of estate planning. The primary concerns addressed were:
A primary purpose of the three hearings was to keep the issue of estate reform on the table in Congress. While many observers do not expect any action to be taken in 2008, estate tax reform is an issue that Congress must confront soon if the consequences of the one-year repeal of the estate tax and the generation-skipping tax (but not the gift tax) in 2010 as provided under current law are to be avoided. McGuireWoods will continue to monitor developments on possible estate tax reform in Congress and will inform subscribers of the developments as they occur.
The full hearing, including the testimony and questions from the Committee, can be viewed online. For more information on the hearing, see the statements of Senators Baucus and Grassley and the full testimony of the experts on the U.S. Senate Committee on Finance website.