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Current Estate Tax Regime and the Need for Reform

Joint Committee on Taxation considers repeal of estate tax code. Key results revealed.

April 17, 2008
by Maggie Rauh, CPA/PFS

Regardless of where you stand on the prickly issue of estate tax reform, most legislators and financial professionals agree that change to our current system is long overdue. If the recent Congressional hearings are any indication, two areas of the estate tax code likely to get a fair amount of scrutiny are the Unified Credit and Estate Liquidity issues.

The panel discussion, hosted by the Joint Committee on Taxation, enabled both invited speakers and members of Congress to cover a broad spectrum of ideas ranging from full repeal of the estate tax to a complete overhaul which would transform it from an estate tax to an inheritance tax. The debate was lively, but the bipartisan consensus was that something needs to be done with our current system.

Changes involving the unified credit seem to be the most straightforward and easily understandable. When Congress passed the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the unified credit was decoupled. Beginning in 2002, under EGTRRA, the estate tax exemption began increasing from $1 million in 2002 to $3.5 million in 2009. The gift tax exemption has remained the same, $1 million. Additionally, the exemption for generation-skipping taxes is $2 million and is not being increased. So a taxpayer could use their maximum unified credit for gift tax purposes and still have unused exemption for general-skipping taxes.

Note: The full publication for the hearing may be accessed at http://www.house.gov/jct/x-23-08.pdf in a document entitled: Joint Committee on Taxation, Taxation of Wealth Transfers Within a Family: A Discussion of Selected Areas for Possible Reform (JCX-23-08),
April 2, 2008.

Decoupling of Exemptions

The decoupling of the exemptions has caused many taxpayers, who would have included gifting in their estate planning, to hold on to their giftable assets. Developing an estate plan which includes using their maximum allowable gift tax exclusion and paying gift tax, no longer makes economic sense when a taxpayer may be able to transfer the same assets at death, tax free.

Roby Sawyers, CPA, a professor in the College of Management at North Carolina State University and a member of the AICPA's Tax Executive Committee, testified that the "re-unification" of the unified credit may, in fact, help stimulate the economy. Older taxpayers' lifestyles and expenses are more moderate. If they begin to transfer assets to their beneficiaries sooner, these younger taxpayers are more apt to use the assets, infusing capital into the economy.

A further complication noted was the uncertainty of the future of the estate tax. The looming 2010 expiration of EGTRRA's estate tax provisions is another contributing factor that is making the decisions of lifetime gifting versus after-death giving more difficult both for taxpayers and their advisors.

Portability of Unified Credit

Another suggestion the panel reviewed was to allow the unified credit to have "portability." Portability of the unified credit would allow a surviving spouse to use a predeceased spouse's unused exemption for estate and gift tax purposes. Portability would eliminate the need for estate equalization between spouses. In her testimony, Shirley L. Kovar, an attorney with Branton & Wilson, APC, pointed out that portability would significantly simplify estate planning and after-death administration for married couples. It would potentially eliminate the need for bypass and administrative trusts with their accompanying requirements as separate taxpayers. She also revealed that reform of portability provisions would simplify the means of getting to an end result that current tax law already allows; it does not provide a new tax benefit.

The House passed two bills in 2006, which included provisions aimed at including portability in the estate tax revisions. However, in order for a surviving spouse to utilize their deceased spouse's credit, an election would have to be made on the estate tax return, even if an estate return is not required to be filed. An additional complication arises when multiple predeceased spouses are involved. In an effort to revise the current estate tax situation, the House bills would simplify estate taxes but would also create new, potentially worse complications.

Installment Paying Provisions for Closely Held Businesses

A third issue discussed was the need to enhance the installment paying provisions for closely held businesses. Dennis I. Belcher, a partner with McGuire Woods, LLP focused his testimony on this topic. Family businesses make up a major part of the United States economy and according to the Raymond Institute/MassMutual 2003 American Family Business Survey, only 30 percent of them survive the death of the business owner. Closely held businesses are illiquid and need the option to pay estate taxes using installment payments. The current rules do not reflect modern business practices relating to the structure of the business and the definition of active versus passive assets.

Across all lines, it is agreed that estate tax reform is necessary. The fact that the hearings are being held and opinions and ideas from all facets of estate planning are being included is a sign that everyone, legislatures and professionals alike, are aware of the need for reform. It will, no doubt, be a long and arduous process, but small steps can be taken to improve the situation at hand.

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Maggie L.N. Rauh, CPA/PFS, MST is at Moriarty and Primack in Springfield, MA. She is a graduate of Smith College with a BA in 1989, Western New England College with a MBA in 1997 and Golden Gate University with a MST in 2004.