Will They or Won't They? Congress and the $600,000 Estate Tax 'Exemption Equivalent'

This Article is NOT CURRENT.
Please see "Estate and Gift Tax Aspects of the 1997 Budget Act" at http://www.ca-probate.com/a_budg97.htm
Will They or Won't They?
Congress and the $600,000 Estate Tax 'Exemption'

Some Pending Bills Which Would Affect Estate and Gift Taxes:

Update 6/16/97: The most recent budget proposal would increase the current $600,000 exemption to $650,000 in 1998; $750,000 in 1999; $765,000 in 2000; $775,000 in 2001-04; $800,000 in 2005; $825,000 in 2006; and $1 million in 2007, after which it would be indexed annually for inflation.

H.R.324 and H.R.683: Would increase size of estates exempt from estate and gift taxation from current $600,000 to $1.2 million on 1/1/98.

H.R.245, H.R. 348, S.2, S.288, S.479, and S.650: Would increase estate and gift tax exemption from $600,000 to $1 million, either immediately or over 5 to 7 years. S.650 would also reduce estate tax rates (currently 37% to 55%) to 20% of amounts above $1 million and 30% for amounts above $10 million.

H.R.1380, H.R.1583, S.2, S.241, S.288, S.479, and S.482: Would exempt from estate taxation certain portions of "qualified family-owned" business or farm interests.

H.R.249, H.R.525, H.R.736, H.R.802, H.R.902, H.R.1040, H.R.1208, S.29, S.75, and S.593: Would repeal all federal estate, gift, and generation-skipping taxes.

S.30: Would exempt estates under $5 million from estate tax

S.31: Would increase exemption (to $1 million in 1998, plus $500,000 annually until 2001, then to $5 million in 2002), followed by repeal of estate, gift and generation-skipping transfer taxes for transfers after 12/31/2002.

H.R.64, H.R.495, and S.549: Would modify "special use valuation" rules.

H.R.1379: Would change the estate and gift tax tables (unable to load bill text)

H.R.228: Would exempt IRA and 401(k) accounts from estate taxation.

S.552: A special-interest bill reducing estate taxes only for the richest forest landowners. It looks like Senator Judd Gregg (R-NH) has decided to follow the path of Bob Dole, who helped enact a special estate-tax law narrowly tailored to benefit the Gallo (winemaking) family, only to have the law repealed after scrutiny of the huge campaign contributions made by the Gallo family to Dole.
Note that most bills would retain the special tax that "recaptures" the unified credit, so that large estates ($10 million to over $20 million) would still pay a 60% marginal estate tax, and the largest estates would not benefit from any increase in the "unified credit" and would continue to pay a flat 55% estate tax.

You can view the text of any pending bill using Thomas.

by Mark J. Welch . . . last updated June 16, 1997

http://www.ca-probate.com/a_taxes.htm

In the past few weeks, the prospects of reductions in federal estate taxes have begun to look more promising than at any time in the past decade.

Currently, federal estate taxes are imposed on the estate of any person who dies leaving assets worth more than $600,000 (excluding bequests to a suriviving spouse or charity). In some cases, a married couple can leave $1.2 million to their heirs tax-free, but only if a special "exemption" or "bypass" trust is created pursuant to a will or living trust at the time of the first spouse's death. Only about 8% of estates owe any estate taxes; estate taxes generate about 1% of federal tax revenue.

In 1994, the Republican "Contract With America" pledged to increase the amount of the "unified credit" to $750,000 over a three-year period, and to increase it annually thereafter based on the inflation rate. That promise was one of the first to be abandoned -- probably because "dead people don't vote."

Bills have been introduced in Congress every year, seeking to increase the "unified credit" for estate and gift taxes (or in some cases to repeal the tax entirely), but the bills have historically died in committees because no one could suggest ways to offset the lost tax revenue. More than 50 bills to alter estate and gift taxes have been introduced in the current 105th Congress.

In early May, the Clinton administration and Congressional leaders reached a budget agreement "in principal" which reportedly includes an increase in the "unified credit" that would exempt estates of up to $1.2 million from federal estate taxes. By mid-June, this eroded to a strangely-staggered increase to $1 million over a ten-year period (see the June 16 "Action Release" from House Ways and Means Committee for details). This proposal might be cut back further or abandoned in favor of other budget priorities.

It's important to recognize that although this proposal to double the "unified credit" would serve to substantially reduce the number of estates subject to federal estate taxes, the bulk of federal estate taxes are collected on the largest 1% of estates.

In addition, it's important to recognize that changes in the amount of the "unified credit" should not result in any fundamental changes in estate planning techniques. Most existing estate plans that include tax planning (including many Wills and "living trusts") will automatically adjust to the larger exemption. (But note that most Wills and "living trusts" do not include any tax-planning provisions.)

Keep in mind, too, that Congress is famous for breaking its promises: the tax law contained provisions for nearly a decade promising to reduce the top estate tax bracket from 55% to 50%, but that provision was delayed each year and eventually abandoned. Thus, if Congress adopts a budget that promises to increase the unified credit incrementally over several years, you should not be surprised if increases are "delayed" each year in favor of deficit reduction or other budget constraints. (Indeed, the June 16 proposal from Congress proposes a very strange "staggered" increase in the estate tax exemption amount, which seems unlikely to survive budget pressures in the years when larger increases are scheduled.)

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