Proposed Bill: “Sensible Estate Tax Act of 2011”


Last week, Congressman Jim McDermott (D-WA), a senior member of the House Ways and Means Committee, introduced HR 3467 the “Sensible Estate Tax Act of 2011”.

According to a release by Congressman McDermott, the bill is the first estate tax reform bill introduced by a member of the tax-writing committee that does not simply extend or repeal the existing estate tax law.

Highlights of the bill include the following:

The Estate Tax Exclusion amount would be reduced to $1,000,000 with top tax rate of 55%.

Under the bill, the estate tax exclusion amount would be reduced to $1 million for decedents dying after December 31, 2011.  The $1 million exclusion amount would be indexed for inflation from 2000 for decedents dying after 2012. The top estate tax rate would be 55%, and the graduated amounts subject to the rate schedule would also be indexed for inflation.

The bill includes provisions designed to coordinate with the gift tax to reflect the decrease in the applicable credit amount.

Portability would be made permanent.

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “2010 Act”) allows portability of estate and gift tax exemptions between spouses.  However, portability under the 2010 Act applies only through December 31, 2012.   

As well as eliminating the portability sunset, the bill would make a technical correction in the definition of “deceased spousal unused exclusion amount (“DSUEA”)” of a surviving spouse.  Pursuant to the bill, the reference to the basic exclusion amount of the last deceased spouse of the surviving spouse would be replaced with a reference to the applicable exclusion amount of the last deceased spouse, so that the statute would reflect the calculation of the DSUEA as described by the Joint Committee on Taxation.

Credit for state death taxes would be restored.

Under the bill, the credit for state transfer taxes paid would be restored.  The credit was phased out beginning in 2002 and the phase out was completed in 2005. Prior to the phase out, many states had estate tax regimes in effect that allowed them to “pick up” the amounts allowable as a federal estate tax credit. The effect of this was to permit the states to share in the estate tax collections, without increasing the totality of the estate tax burden.  The bill would restore the revenue sharing mechanism with the states.

Rules on Valuation Discounts and Minority Interest Discounts would be modified.

The proposal includes valuation rules for certain transfers of nonbusiness assets (defined as an asset which is not used in the active conduct of 1 or more trades or businesses), including: 

in the case of the transfer of an interest in an entity which is not actively traded, no valuation discount would be allowed with respect to “nonbusiness assets”; 
in the case of the transfer of an interest in an entity which is not actively traded, no discount would be allowed by reason of the fact that the transferee does not have control of the entity if the transferee and the transferee’s family members have control of the entity. 

The proposal would apply to transfers after the date of enactment.

Consistency in Value For Transfer and Income Tax Purposes would be required.

The proposal would impose a consistency and a reporting requirement, with penalties imposed for inconsistent basis reporting. For example, the basis of property acquired from a decedent pursuant to Internal Revenue Code (“IRC”) Section 1014 must equal the value of that property for estate tax purposes, and the basis of property received by gift must equal the donor’s basis determined under IRC Section 1015.   

The proposal would apply to transfers for which returns are filed after the date of enactment.

Restrictions to GRATs would be imposed.

The proposal includes the following: 

1. A requirement that a GRAT have a minimum 10 year term; 
2. A requirement that the annuity payment not be reduced from one year to the next during the first 10 years of the GRAT term; and 
3. A requirement that the remainder interest at the time of the transfer have “a value greater than zero.’’ 

The bill contains no guidance regarding the parameters of the  “greater than zero” requirement. 

The proposal would apply to transfers made after the date of enactment.

The Duration of GST tax exemption would be limited.

The proposal essentially provides for the expiration of GST exemption 90 years after the establishment of a trust. Specifically, this would be achieved by increasing to one the inclusion ratio with respect to property transferred after that date. 

The proposal would apply to trusts created after enactment, and to transfers made from pre-existing trusts if the transfer is made out of corpus added to the trust after the date of enactment (subject to grandfathering exceptions).

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