Taxation & Estate Planning

House Bill to Modify Estate Tax

By Deirdre R. Wheatley-Liss, Esq.

Courtesy of Elderlawanswers.com, the House has introduced a bill to modify the federal estate tax as follows:

With the estate tax set to expire in 2010, a bipartisan bill (H.R. 3170, click here. ) has been introduced in the U.S. House of Representatives that would increase the estate tax exemption by $250,000 every year from 2009, when the exemption is set to be $3.5 million, until 2015, at which point the exemption would have increased to $5 million. From 2015 on the exemption would rise at the rate of inflation.

The bill, introduced by Reps. Harry Mitchell (D-AZ) and Christopher Shays (R-CT),
would also create two tax rates: 15 percent for estates worth $25 million and
less and 30 percent for estates worth more than $25 million. Under current law,
the top tax rate will be 45 percent in 2009.

Earlier in the year, the U.S. Senate voted 51-41 to reaffirm its support for a budget resolution that establishes the current-law 2009 estate tax rules through 2012.

While this would simplify matters from a certainty viewpoint (it is very difficult to do planning for a tax code with an expiration date), my initial reaction is concern about the rates. When a person dies, capital gains are essentially eliminated through IRC Sec. 1014 where there is a "step-up" in basis - the heirs basis is date of death value; any gains accumulated during the decedent's lifetime are wiped out. If the estate tax rate of 15% is lower then the capital gains tax rate (currently 15%, but again scheduled to expire), the economic disincentive to sell stock during your lifetime continues. Perhaps if the desire is to lower the estate tax rate, it would make sense to have it match the capital gains tax rate so that death essentially becomes a realization event for tax purposes.

Full post as published by New Jersey Estate & Elder Planning Blog on September 04, 2007 (boomark / email).