Estate Planning

Baucus Bill Keeps $3.5 Million Estate Tax Exemption

By Gregory Herman-Giddens

From the GiftLaw eNewsletter:

Senate Finance Committee Chair Max Baucus (D-MT) introduced the Taxpayer Certainty and Relief Act of 2009 on March 26, 2009. The tax bill includes a $2.3 trillion middle class tax cut package and also creates a freeze on estate tax rates and major estate planning modifications.

Sen. Baucus indicated, "By guaranteeing a little extra cash in the pocket of working moms and dads and by making sure that the AMT and the estate tax can move with the economy, we avoid sweeping tax increases for millions of American families."

The bill would make permanent many of the provisions enacted for tax relief during the past decade. Several of the provisions are intended to reduce income taxes for low and middle income taxpayers. The bill would not change the scheduled increase in the top two tax brackets in 2011 to 36% and 39.6%.

The middle class reductions:

1. For taxpayers in the 10%, 15%, 25% and 28% brackets, the rates are continued.

2. The alternative minimum tax exemption is indexed for inflation.

3. The zero percent long-term capital gain rate for taxpayers in the 10% and 15% bracket is continued.

4. The child tax credit is refundable for incomes below $3,000.

5. The marriage penalty relief for taxpayers in the 15% bracket is continued.

6. The adoption and exclusion caps of $10,000 per eligible child are continued.

Sen. Baucus proposes significant changes in estate taxes. Rather than repealing the estate tax in 2010, the exemption is frozen at $3.5 million per person ($7 million per couple), with the estate tax rate set at 45%. The exemption would be increased for inflation in $10,000 increments starting in 2011.

Farmers and ranchers would benefit from an increase in the special use valuation from $750,000 to $3.5 million. This would permit transfer of very valuable farms and ranches from parents to children who are actually operating the farm or ranch.

A change that will require modifications to most large estate plans is the proposal to pass "marital deduction portability." If a surviving spouse passes away with an estate larger than the applicable exemption, he or she will be able to use the "aggregate deceased spousal unused exclusion amount."

In order to use a portion of the first decedent spouse's exclusion, his or her executor must make an election on that estate tax return. If the "Spousal Unused Exclusion" election is made, the surviving spouse may then use the remaining unused exemption.

If this bill becomes law, the full estate could be transferred to surviving spouse and he or she will have an estate exemption of $7 million.
 

Note:  If this bill becomes law, the first tendency of many couples with taxable estates will be to revise their wills or trusts to do away with the credit-shelter (bypass) trusts.  However, there will still be compelling reasons to have such trusts.  With a credit-shelter trust, growth in the value of the assets is also protected from estate taxes, while that is not necessarily true if a couple relies on exemption portability.  In addition, the credit shelter (or marital) trust provides valuable protection from mismanagement, creditors, and future spouses.

Full post as published by North Carolina Estate Planning Blog on March 28, 2009 (boomark / email).