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AALU INSIGHTS

Despite Lobbying, Estate Tax Unlikely To Pass This Year

Most members of the Association for Advanced Life Underwriting are expert life insurance practitioners who work with clients and technical advisors in using life insurance in effective estate plans.

Accordingly, how and when Congress will act on estate tax reform legislation is a vital concern. AALU has met in recent months with nearly every legislator who will affect the result.

What Obstacles Impede Enactment of Estate Tax Reform Legislation in 2010?

Turning to the estate tax, although some Democrats are concerned about the very significant cost of reform with a $3.5 million exemption and 45 percent top rate, roughly $256 billion over 10 years, some key Democrats on the Senate Finance Committee continue to press for a more generous and more costly $5 million exemption and 35 percent top rate. This has made finding 60 votes in the Senate difficult, and if we've learned anything over the past three weeks, fiscal concerns over costly tax measures can lead to roadblocks and stalemates over longer-term tax extenders.

Congress has little time left to work through such difficult issues. Historically, congressional work in September and October during election years is truncated, and majority leaders typically try to avoid tough votes that could sway elections.

Another possibility is that the estate tax issue and other tax provisions could be resolved late in the year after the November midterm elections in a "lame duck" session of Congress. However, there is a significant chance that such delayed congressional consideration of estate tax reform will repeat the stalemate and inaction that occurred in 2009 and push resolution into 2011.

Other Federal and State Considerations

Federal legislators are also considering how to deal with estates of decedents dying on or after January 1, 2010, and before January 1, 2011. One concept discussed is permitting such estates the option of complying with the estate tax repeal and carryover basis provisions in effect during 2010 or complying with the estate tax law that is eventually enacted for the 2011 tax year.

In addition, state pressures are also mounting. These pressures are coming largely from estates in which decedents had written wills and irrevocable trusts under the assumption that a federal estate and Generation Skipping Tax (GST) would be in place, and which now face unintended consequences-such as the disinheritance of children, spouses and charities-as a result of the absence of the tax. So many states have enacted, or plan to enact, special "patch" legislation to provide default donor intent to deal with the current dilemma of individuals dying in 2010 but with documents prepared in a world of estate and GST tax and no carryover basis. Furthermore, practitioners around the country are facing the question of funding insurance trusts in 2010 with no GST to allocate.

When Congress Resolves the Estate Tax Issue, What Will Be the Most Likely Result?

Overall, due to the heavy and increasing emphasis on the estate tax, when Congress resolves the issue, the most likely level of reform appears to be an exemption level of $3.5 million and a 45 percent top rate.

From AALU's perspective, a vital feature of estate tax reform is permanence and sustainability. Effective estate plans that transfer businesses and other assets from one generation to another and keep enterprises producing jobs, products and services that fuel the economy typically extend over multidecade periods. Given the escalating size of the federal deficit, reform with a higher exemption than $3.5 million or a rate lower than 45 percent may not be sustainable over such a multidecade period.

Even though it will increase the cost of reform somewhat-but far less so than changes to the exemption level or rate- AALU continues to urge that other features be added to estate tax reform. The feature that AALU thinks is most important is the reunification of gift and estate tax exemption levels. We also support indexing the exemption level for inflation, as well as "portability," to simplify planning and lessen the need to establish certain trusts, by allowing a surviving spouse to use the unused exemption of a deceased spouse.

Tax policy enacted in 2001 decoupled the estate and gift tax credits and created a perverse incentive for business owners to hold their assets until death rather than passing them to the younger generation managing the business. Reunifying the estate and gift tax credits would allow for increased intergenerational transfer, enabling greater liquidity for businesses, stimulating more efficient business decision making and enhancing economic growth.

In Hunt for Revenue, Congress Targets GRATs [email protected].


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