On Thursday, March 26, 2009, Senate Finance Committee Chairman Max Baucus (Dem-MT) introduced legislation which would make permanent many of the tax cuts enacted by President Bush in 2001.
The relevant Estate and Gift tax provisions of the legislation are as follows:
Make permanent the estate, gift and Generation Skipping Transfers (GST) tax cuts;
Reunify the gift tax and estate tax by increasing the gift tax exemption to $3.5 million;
Make permanent the 45% top estate, gift and GST tax rate bracket;
Make permanent the $3.5 million applicable exclusion amount;
Index the applicable exclusion amount, gift tax exemption and GST exemption for inflation after 2010; Make the unused applicable exclusion amount of the first spouse to die available to the surviving spouse (portability).
An important aspect of this new legislation is the reunification of the estate and gift tax. This would greatly simplify estate planning and help taxpayers by removing an artificial restriction that discourages transfers between family generations during lifetime. Introduction of this legislation, especially by a Democrat, represents significant progress towards sustainable estate and gift tax reform that will enable clients to plan with more certainty.
The portability provision (as previously discussed in this blog) allows a deceased spouse’s unused applicable exclusion amount to be used by the surviving spouse. However, the first spouse’s unused applicable exclusion amount will not be indexed for inflation after the first spouse’s death. The carried-over amount is available for either estate or gift tax purposes, but not for Generation Skipping Transfers tax purposes. Administratively, the Estate Tax filing requirement for a surviving spouse’s estate will still be based upon the amount of his or her own applicable exclusion amount, without regard to the carried over portion of the first spouse’s exclusion. The IRS will have no statute of limitations on the period when it can examine the first spouse’s estate tax return to adjust the amount of applicable exclusion amount carried over by the surviving spouse.
The proposed law presents an interesting planning opportunity. The surviving spouse could take advantage of a carryover of unused applicable exclusion amounts from more than one predeceasing spouse, but the total cannot exceed $3.5 million. A more effective estate-planning tool would be for each predeceasing spouse to create a nonmarital trust for the surviving spouse’s benefit for the full amount of the $3.5 million exclusion. Although the surviving spouse would have the use of the assets in the nonmarital trust for his or her lifetime, the trust would not be included in the estate of the surviving spouse. As the legislation is drafted, there is no limit on the number of such trusts that can be established by predeceasing spouses.
Joseph W. Kenny is a director and shareholder of Hamblett & Kerrigan, P.A. and practices in the areas of estate planning and taxation. He is also a Certified Public Accountant with certification as a Personal Financial Specialist. You can reach Attorney Kenny by email at [email protected].