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Estate Tax Plan Clears the Heir

Estate planners joke that 2010 is the year to “throw grandma from a train.” Due to provisions in the Bush tax cuts that passed in 2001, on January 1, 2010, the estate tax disappeared for one year. By dying in 2010, Texas billionaire Dan Duncan saved his estate nearly $5bn in taxes that would have applied had he died in 2009 or 2011. Attorney Hank Moravec writes that on January 1, 2011 the estate tax will return with a top tax rate of 55% and exempt only the first $1 million of an estate. According to his tax calculations, “the heirs [to the] middle-upper class who are moderately wealthy due to property and retirement plans will pay significantly more unless Congress acts to change the law. People who would not have had to worry about estate tax will need to plan if Congress changes the law or if Congress allows the tax to revert to 2001 rates.”

Until Congress acts or signals its intent to let the estate tax revert, estate planners face the daunting task of planning for the unknown. On Thursday, Senator Bernie Sanders (I – VT) and three Senate Democrats moved to resolve this ambiguity by proposing an estate tax plan that would raise the exemption to $3.5 million, but increase the tax rate for the wealthiest individuals. “At a time when we have a record-breaking $13 trillion national debt and a growing gap between the very rich and everyone else, people who inherit multi-million and billion dollar estates must not be allowed to avoid paying their fair share in estate taxes,” Senator Sanders said.

Paul Caron summarizes the bill as follows:

  • Exempts the first $3.5 million of an estate from federal taxation ($7 million for couples), the same exemption that existed in 2009. Doing this would mean that 99.75% of all estates would be exempted from the federal estate tax in 2011 alone.
  • Includes a progressive rate structure so that the super wealthy pay more. Under our bill, the rate for the value of the estate above $3.5 million and below $10 million would be 45%, the same as the 2009 level. The rate on the value of estates above $10 million and below $50 million would be 50%, and the rate on the value of estates above $50 million would be 55%.
  • Includes a billionaire’s surtax of 10%. Our bill also imposes a 10% surtax on the value of an estate above $500 million ($1 billion for couples). According to Forbes Magazine, there are only 403 billionaires in the United States with a collective net worth of $1.3 trillion. Clearly, the heirs to these multi-billion fortunes should be paying a higher estate tax rate than others.
  • Closes all of the Estate and Gift Tax Loopholes requested in President Obama’s Fiscal Year 2011 budget. These loophole closers include requiring consistent valuation for transfer and income tax purposes; a modification of rules on valuation discounts; and a required 10-year minimum term for Grantor Retained Annuity Trusts (GRATS). OMB has estimated that closing these loopholes that benefit the super-wealthy, would raise at least $23.7 billion in revenue over 10 years.
  • Protects family farmers by allowing them to lower the value of their farmland by up to $3 million for estate tax purposes. Under current law, the value of farmland can be reduced up to $1 million for estate tax purposes under § 2032(a) (Special Use Valuation). Our bill increases this level to $3 million and indexes it to inflation.
  • Benefits farmers and other landowners by providing estate tax relief for conservation easements. Our bill provides tax relief to farmers and other landowners by amending estate tax rules for conservation easements through an increase in the maximum exclusion amount to $2 million and increasing the base percentage to 60%.

The estate tax plan would be retroactive to January 1, 2010. According to Rosemary D. Durkin, “This retroactive imposition of a tax will undoubtedly face legal challenges, specifically that such a law is unconstitutional. The U.S. Supreme Court, however, has upheld such retroactive legislation in the past.” If the bill passes muster in the Senate, and the courts uphold the retroactive clause, heirs face the unpleasant prospect of exhuming grandma’s checkbook.

View Senator Sanders’ press release announcing the bill here.

Video of Senator Sanders’ announcing his estate-tax plan in a speech on the floor of the U.S. Senate:

For more information about estate planning or to find an estate planning lawyer in your neighborhood, visit the Estate Planning Legal Center.

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