Taxation & Estate Planning

The CBO ? Estate Tax Alternatives

By michael

The Congressional Budget Office has published the creatively titled:  The Estate Tax and Charitable Giving. (warning, link is a PDF)

The preface reads in pertinent part:

This paper by the Congressional Budget Office (CBO) [...] examines the effect that changing the estate tax would have on donations to charity. Because charitable bequests lower the taxable amount of estates, the tax gives people an incentive to contribute to charity at death rather than leave assets to heirs. Furthermore, the estate tax provides an incentive to make charitable contributions during life. The paper finds that increasing the amount exempted from the estate tax from $675,000 to either $2 million or $3.5 million would reduce charitable giving by less than 3 percent. However, repealing the tax would have a larger impact, decreasing donations to charity by 6 percent to 12 percent.

The following three alternatives are presented:

Alternative 1 would set the exemption for the combined
tax at $5 million starting in 2010, index that
amount for inflation, and set the tax rate equal to the
top rate on capital gains (currently set for 15 percent
in 2010 and 20 percent thereafter). Stepped-up basis
would apply to assets transferred from a decedent. No
deduction or credit would be given for state death
taxes. This alternative would reduce revenues by
$128 billion over the period from 2010 to 2014. In
2014, approximately 5,300 estates would be required
to pay some federal estate tax under this alternative,
compared with about 58,000 under current law (after
EGTRRA?s expiration).

Alternative 2 would make the same changes, except
that instead of a single tax rate, two would apply. The
first $25 million of the taxable estate would be taxed
at the top capital gains rate, and taxable transfers
above $25 million would be taxed at 30 percent. (The
$25 million threshold would be indexed for inflation.)
Through 2014, revenues would fall by $117 billion.
In that year, some 5,300 estates would have federal
estate tax liabilities, compared with about 58,000
under current law.

Alternative 3 would set the exemption at $3.5 million
beginning in 2010, index that amount for inflation,
and set the tax rate at 45 percent. The stepped-up
basis would continue to apply to assets transferred
from a decedent, but unlike the other three
approaches, this alternative would retain EGTRRA?s
deduction for state death taxes. Those changes would
reduce revenues by $65 billion over five years. About
9,400 estates would pay some federal estate tax in
2014 under this alternative, compared with about
58,000 under current law.

Alternative 4 would make EGTRRA?s provisions for
estate and gift taxes in 2010 permanent rather than
temporary. Thus, the estate tax would not be reinstated,
and the gift tax exemption would remain at
$1 million. In addition, this alternative would permanently
retain the modified carryover basis that
EGTRRA specifies in 2010 for some transferred
assets. Together, those changes would reduce revenues
by $163 billion between 2010 and 2014, and no one
would pay federal estate taxes in 2014.

All three proposals use the $1 million federal estate tax exemption as their baseline, which, in light of my previous post, suddenly doesn’t seem all that unlikely.  “Alternative 3 is closest to what the President proposed in his May budget.”  (see this post by Jim Gust of the Trust and Wealth Management Marketing Blog.)

Full post as published by The Ohio Trust & Estate Blog on August 08, 2009 (boomark / email).