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Estate Tax Update

Of course, we all know the federal estate tax is not really going to go away in 2010. Here is a brief summary of the tax’s status as of today.

There are three major bills in Congress:

Senate Bill 722 would make permanent the 2009 $3.5 million exemption and top 45% tax rates, reunify the estate and gift tax credit, allow for portability (allow a transfer of a deceased spouse’s unused exemption to the surviving spouse), and, index the exemption for inflation.

House Bill 2032 would make permanent the exemption level at $2 million, index that level for inflation, establish progressive tax rates of 45% for estates valued between $2 million and $5 million; 50% for estates valued at $5 to $10 million; and 55% for estates valued over $10 million, reunify the estate and gift tax, create exemption portability, restore the state estate tax credit, and provide indexing for inflation.

House Bill 436 would freeze the exemption and rate at 2009 levels, reunify the estate and gift tax so that the cap on tax free lifetime gifts would go from its present $1 million to $3.5 million (but use up that protected amount so whatever exemption was used during lifetime would not be available at death), limit the valuation discount for family limited partnerships, and provide strict valuation rules for transfer of non-business assets.

Further, the Congressional Budget Office has presented Congress with four options:

Option 1 would set the exemption for the combined tax at $5 million starting in 2010, index that amount for inflation, set the tax rate equal to the top rate on capital gains (currently 15% in 2010 and 20% thereafter), allow a stepped-up basis for assets transferred from a decedent, and deny a deduction or credit for state death taxes.

Option 2 would make the same changes as Option 1, but a two-tiered rate would be used — the first $25 million of taxable assets would be subjected to the top capital gains rate, then taxable transfers above $25 million would be taxed at 30% (and the $25 million threshold would be indexed for inflation).

Option 3 would retain the $3.5 million exemption, index that amount for inflation, set the top tax rate at 45%, retain a step-up in basis, and allow a deduction for state death taxes.

Option 4 would repeal the estate tax in 2010, retain a $1 million gift tax exemption, and institute a carryover basis regime.

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