Three U.S. Senators are calling for a 10% “Billionaire’s Surtax.”  In a letter addressed to their colleagues, the three senators who are advocating for the tax write, “According to Forbes Magazine, there are only 403 billionaires in the U.S. with a collective net worth of $1.3 trillion. Clearly, the heirs to these multibillion fortunes should be paying a higher estate tax rate than others.”

The letter also points out the case of the late Dan L. Duncan, the billionaire Texan who died in March, whose $9.8 billion fortune, because of the now lapsed Federal Estate Tax, will pass to his heirs estate tax free.  The senators write, “At a time when we have a record-breaking $13 trillion national debt and an unsustainable federal deficit, people who inherit multimillion- and billion-dollar estates must pay their fair share in estate taxes.” 

The senators’ proposal would be retroactive to the start of 2010, which would likely face a court challenge from Duncan’s heirs as well as others.

As we have been following, the federal estate tax is set to disappear in 2010.   The push by Democrats to extend the current rate permanently failed to pass a short- term extension to override the tax’s expiration date last week.    Currently the top rate is 45%, with a $3.5 million exclusion rate.  Per the 2001 Legislative act and if Congress can get nothing done, there is no estate tax for the 2010 year but come 2011, the rate will increase to 55%, with a $1 million exclusion rate. 

There is also a little known provision inside the 2001 legislative act that may cause much angst to those people who inherit property 2010 and later sell it paying a higher capital gains tax.  This means that you have to calculate the gain based on the price the decedent paid for the asset, instead of the value at the time of transfer.  This means that many people would have a new capital gains liability from the provision in the 2001 Legislative act.  So instead of looking at the 2010 year as a tax break, it will be another tax increase for those that inherit property. 

The combination of depressed asset values and confusion over the estate tax rules has created an environment where people are not moving forward with their planning, sitting on the sidelines waiting for Congress to make a ruling.  Hopefully, Congress will be spurred into action early next year to address the issues around this legislative act.  They need to move forward so that many upper and middle class families can proceed with effective estate planning.

Serves me right, I go on a wonderful 10 day vacation from work and look what happens:  Congress finally passes an estate tax bill.  The full story is that the House has passed a bill that would permanently FREEZE the applicable exclusion amount (i.e., the amount that passes free of Federal estate tax) to 3.5 million and FREEZES the rate at 45%.  The Senate will now take up the passed House bill.  Then, if the Senate makes any changes, it goes to a conference committee.
 
The good news:  Something may happen before the end of this year to end the uncertainty.  AND the bill that passed the House does not change any other aspect of the estate tax laws (other than repealing carryover basis, which would have been a disaster anyway).  Therefore, GRATS, valuation discounts and other estate planning tax reduction techniques are still viable.
 
The bad news:  Anything can happen and NOTHING is permanent.  Hence, Congress can still act before the end of this year to eliminate or restrict GRATS and valuation discounts.  Clients should not be lulled into a false sense of security.  Action should be taken as soon as possible before Congress closes the door on these techniques.