On March 26, 2009, Senator Max Baucus (D-MT), the Chairman of the Senate
Finance Committee, introduced the Taxpayer Certainty and Relief Act of 2009 (S.
722). Senators Jay Rockefeller (D-WV) and Charles Schumer (D-NY), both Finance
Committee members, were cosponsors. Title III of S. 722 is captioned “Permanent
Estate Tax Relief,” and it is significant. If enacted, it would make the 2009
estate tax law permanent, reconform the gift tax to the estate tax, provide a
simplified way for a surviving spouse to use the unused estate tax exemption of
the first spouse to die, and expand the “special use valuation” benefits for
owners of farms and businesses.
Current Estate and Gift Tax Exemptions and Rates
Beginning this year, by operation of a “unified credit” based on an
“applicable exclusion amount,” the federal estate tax provides what is
equivalent to an exemption of $3.5 million per person, or $7 million for a
married couple if each spouse has sufficient property and an estate plan that
makes full use of the exemption. The estate tax rate is a flat 45%. For gift tax
purposes, the exemption for lifetime gifts is only $1 million. Over $1 million,
the gift tax rate begins at 41% and reaches the top rate of 45% at a level of
Under legislation enacted in 2001, the estate tax (as well as the
generation-skipping transfer tax), but not the gift tax, is scheduled to be
repealed in 2010, and it returns in 2011 with an exemption of only $1 million
and rates of up to 55% and higher.
Permanent Rates and Exemptions
Earlier this year, the Obama Administration’s budget proposals included a
proposal to make the $3.5 million estate tax exemption permanent, and also to
retain the current estate tax rate of 45%.
S. 722, like the Administration proposal, would make the $3.5 million estate
tax exemption and 45% estate tax rate permanent. In addition, it would fully
unify the gift tax with the estate tax by also making the lifetime gift tax
exemption $3.5 million. Beginning in 2011, it would index both exemptions for
Portability of the Exemption Between Spouses
S. 722 would also provide for the long-awaited “portability” of the unused
gift and estate tax exemptions of a deceased spouse to the surviving spouse and
the surviving spouse’s estate. For example, if Husband 1 dies after 2009 without
using his full exemption, perhaps because he leaves everything to Wife and it
qualifies for the marital deduction, Wife may use the unused portion of Husband
1’s exemption for her own lifetime gifts, and her estate may use it at her death
to augment her own estate tax exemption.
If Wife marries Husband 2, who then also dies, she may use the unused
exemptions of both Husband 1 and Husband 2, subject to an overall limitation
that the survivor’s exemption can be no more than doubled. But if Husband 2 dies
before Wife, he can use Wife’s own unused exemption but he cannot use any of
Husband 1’s unused exemption transmitted through Wife’s estate.
To take advantage of this new portability, a federal estate tax return would
have to be filed when the first spouse dies, and portability would have to be
elected on that return.
Even if S. 722 or some other form of portability legislation is enacted, many
married individuals will forgo portability and continue to use credit shelter
trusts (sometimes called bypass trusts), in order to exclude the intervening
appreciation in value from estate tax at the surviving spouse’s death, or, if
appropriate, to allocate GST exemption, which is not covered by S. 722 and might
not be covered by any final portability legislation.
Special Use Valuation of Farmland and Other Business Real Estate
The estate tax is generally imposed on the fair market value of property,
which is its “highest and best use” value. In the case of real estate like
farmland, its highest and best use value might be its value for development, and
that might be considerably more than its value as a farm.
Special valuation rules in the estate tax law permit real estate used as a
family farm or used in another family business to be valued at its farm or
business use, not its highest and best use, if it comprises a large enough share
of the estate and meets other requirements for qualification. The overall amount
by which the estate tax value may be less than the highest and best use value is
limited. This year that limitation is $1 million. It is increased from year to
year with reference to inflation indices.
S. 722 would make that limitation equal to the estate tax exemption. Thus,
for 2010, the limitation would increase from $1 million to $3.5 million, and
then would be indexed for inflation after 2010. At a 45% rate, that increase
would save $1,125,000 in tax for an estate containing the right mix of farm or
other business property. In some states with their own estate tax, the savings
could be higher. In effect, that estate would have a double exemption.
If a proposal like this is enacted, it would be a good occasion for anyone
with significant farm or business real estate assets to consider whether the
special valuation benefit might be available, how large a benefit it might be,
and what might be done to secure or strengthen one’s eligibility for that
Broad Appeal and Support
Permanence in the estate tax law is very much needed. Portability is both
popular and “populist” (in the political sense) because it is thought to mostly
benefit folks at the lower end of estate tax payers. Similarly, the changes to
special use valuation are targeted to family farms and, to a lesser extent,
other family businesses. In that respect, S. 722 presents a “middle class”
flavor, which is a good credential to have these days.
Also in the vein of “middle class” tax relief, S. 722 would address the
individual alternative minimum tax, the regular and capital gains tax rates for
lower- and middle-income taxpayers, the child tax credit, marriage penalty
relief, the dependent care credit, the adoption credit and adoption assistance
programs, and the earned income tax credit. That grouping of hot topics, plus
the support from the Chairman and two other members of the Finance Committee,
make S. 722 a serious legislative proposal.
To be enacted into law, tax legislation must originate in the House of
Representatives. But if S. 722 attracts support of other Finance Committee
members and the Senate leadership, that traction will be noticed by those who
draft tax legislation in the House, especially since S. 722 includes alternative
minimum tax relief, which is a priority for Chairman Rangel (D-NY) of the House
Ways and Means Committee. Alternatively, all or part of S. 722 could be added as
a Senate amendment to a House-passed tax bill. Either way, S. 722 could be an
important step toward stability in the estate tax law, and the estate planning
lawyers at McGuireWoods will be watching its progress.
On March 23, 2009, McGuireWoods LLP
announced a formal agreement to combine with the
London-based international law firm of
Rakison LLP (GMR), allowing the firm to better
serve its clients and those of GMR with wealth
management matters through an enhanced
Private Wealth Services team.