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A bill entitled the Certain Estate Tax Relief Act of 2009 was recently introduced in the U.S. House of Representatives.  The bill retains the current $3.5 million federal estate tax exemption, freezes the estate tax rate at 45%, and repeals the carryover basis rules which would otherwise be in place next year. The effective date would be January 1, 2010.

The bill also contains a provision disallowing valuation discounts for transfers for interests in entities (such as LLCs and corporations) containing "nonbusiness assets."   This is aimed at preventing the use of family limited partnerships and limited liability companies (which are not true operating businesses - holding marketable securities, for example) for discounted transfers to younger family members.  This would eliminate a common and highly effective method for gift and estate tax reduction, but LLCs would continue to be an excellent tool for asset protection.  The effective date of this portion of the Act would be the date of enactment.

Click "Continue Reading" for the text of the bill.

 

HR 436 IH

111th CONGRESS

1st Session

H. R. 436

To amend the Internal Revenue Code of 1986 to repeal the new carryover basis rules in order to prevent tax increases and the imposition of compliance burdens on many more estates than would benefit from repeal, to retain the estate tax with a $3,500,000 exemption, and for other purposes.

IN THE HOUSE OF REPRESENTATIVES

January 9, 2009

Mr. POMEROY introduced the following bill; which was referred to the Committee on Ways and Means

A BILL

To amend the Internal Revenue Code of 1986 to repeal the new carryover basis rules in order to prevent tax increases and the imposition of compliance burdens on many more estates than would benefit from repeal, to retain the estate tax with a $3,500,000 exemption, and for other purposes.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

This Act may be cited as the ‘Certain Estate Tax Relief Act of 2009’.

SEC. 2. RETENTION OF ESTATE TAX; REPEAL OF CARRYOVER BASIS.

(a) In General- Subtitles A and E of title V of the Economic Growth and Tax Relief Reconciliation Act of 2001, and the amendments made by such subtitles, are hereby repealed; and the Internal Revenue Code of 1986 shall be applied as if such subtitles, and amendments, had never been enacted.

(b) Sunset Not To Apply- Section 901 of the Economic Growth and Tax Relief Reconciliation Act of 2001 shall not apply to title V of such Act.

(c) Conforming Amendments- Subsections (d) and (e) of section 511 of the Economic Growth and Tax Relief Reconciliation Act of 2001, and the amendments made by such subsections, are hereby repealed; and the Internal Revenue Code of 1986 shall be applied as if such subsections, and amendments, had never been enacted.

SEC. 3. MODIFICATIONS TO ESTATE TAX.

(a) $3,500,000 Exclusion Equivalent of Unified Credit- Subsection (c) of section 2010 of the Internal Revenue Code of 1986 (relating to applicable credit amount) is amended by striking all that follows ‘the applicable exclusion amount’ and inserting ‘. For purposes of the preceding sentence, the applicable exclusion amount is $3,500,000.’.

(b) Freeze Maximum Estate Tax Rate at 45 Percent; Restoration of Phaseout of Graduated Rates and Unified Credit-

(1) Paragraph (1) of section 2001(c) of such Code is amended by striking the last 2 items in the table and inserting the following new item:

—————————————————————————————————————————————-

—————————————————————————————————————————————-

‘Over $1,500,000 $555,800, plus 45 percent of the excess of such amount over $1,500,000.’.

—————————————————————————————————————————————-

(2) Paragraph (2) of section 2001(c) of such Code is amended to read as follows:

‘(2) PHASEOUT OF GRADUATED RATES AND UNIFIED CREDIT- The tentative tax determined under paragraph (1) shall be increased by an amount equal to 5 percent of so much of the amount (with respect to which the tentative tax is to be computed) as exceeds $10,000,000. The amount of the increase under the preceding sentence shall not exceed the sum of the applicable credit amount under section 2010(c) and $119,200.’.

(c) Effective Date- The amendments made by this section shall apply to estates of decedents dying, and gifts made, after December 31, 2009.

SEC. 4. VALUATION RULES FOR CERTAIN TRANSFERS OF NONBUSINESS ASSETS; LIMITATION ON MINORITY DISCOUNTS.

(a) In General- Section 2031 of the Internal Revenue Code of 1986 (relating to definition of gross estate) is amended by redesignating subsection (d) as subsection (f) and by inserting after subsection (c) the following new subsections:

‘(d) Valuation Rules for Certain Transfers of Nonbusiness Assets- For purposes of this chapter and chapter 12—

‘(1) IN GENERAL- In the case of the transfer of any interest in an entity other than an interest which is actively traded (within the meaning of section 1092)—

‘(A) the value of any nonbusiness assets held by the entity shall be determined as if the transferor had transferred such assets directly to the transferee (and no valuation discount shall be allowed with respect to such nonbusiness assets), and

‘(B) the nonbusiness assets shall not be taken into account in determining the value of the interest in the entity.

‘(2) NONBUSINESS ASSETS- For purposes of this subsection—

‘(A) IN GENERAL- The term ‘nonbusiness asset’ means any asset which is not used in the active conduct of 1 or more trades or businesses.

‘(B) EXCEPTION FOR CERTAIN PASSIVE ASSETS- Except as provided in subparagraph (C), a passive asset shall not be treated for purposes of subparagraph (A) as used in the active conduct of a trade or business unless—

‘(i) the asset is property described in paragraph (1) or (4) of section 1221(a) or is a hedge with respect to such property, or

‘(ii) the asset is real property used in the active conduct of 1 or more real property trades or businesses (within the meaning of section 469(c)(7)(C)) in which the transferor materially participates and with respect to which the transferor meets the requirements of section 469(c)(7)(B)(ii).

For purposes of clause (ii), material participation shall be determined under the rules of section 469(h), except that section 469(h)(3) shall be applied without regard to the limitation to farming activity.

‘(C) EXCEPTION FOR WORKING CAPITAL- Any asset (including a passive asset) which is held as a part of the reasonably required working capital needs of a trade or business shall be treated as used in the active conduct of a trade or business.

‘(3) PASSIVE ASSET- For purposes of this subsection, the term ‘passive asset’ means any—

‘(A) cash or cash equivalents,

‘(B) except to the extent provided by the Secretary, stock in a corporation or any other equity, profits, or capital interest in any entity,

‘(C) evidence of indebtedness, option, forward or futures contract, notional principal contract, or derivative,

‘(D) asset described in clause (iii), (iv), or (v) of section 351(e)(1)(B),

‘(E) annuity,

‘(F) real property used in 1 or more real property trades or businesses (as defined in section 469(c)(7)(C)),

‘(G) asset (other than a patent, trademark, or copyright) which produces royalty income,

‘(H) commodity,

‘(I) collectible (within the meaning of section 401(m)), or

‘(J) any other asset specified in regulations prescribed by the Secretary.

‘(4) LOOK-THRU RULES-

‘(A) IN GENERAL- If a nonbusiness asset of an entity consists of a 10-percent interest in any other entity, this subsection shall be applied by disregarding the 10-percent interest and by treating the entity as holding directly its ratable share of the assets of the other entity. This subparagraph shall be applied successively to any 10-percent interest of such other entity in any other entity.

‘(B) 10-percent INTEREST- The term ‘10-percent interest’ means—

‘(i) in the case of an interest in a corporation, ownership of at least 10 percent (by vote or value) of the stock in such corporation,

‘(ii) in the case of an interest in a partnership, ownership of at least 10 percent of the capital or profits interest in the partnership, and

‘(iii) in any other case, ownership of at least 10 percent of the beneficial interests in the entity.

‘(5) COORDINATION WITH SUBSECTION (b)- Subsection (b) shall apply after the application of this subsection.

‘(e) Limitation on Minority Discounts- For purposes of this chapter and chapter 12, in the case of the transfer of any interest in an entity other than an interest which is actively traded (within the meaning of section 1092), no discount shall be allowed by reason of the fact that the transferee does not have control of such entity if the transferee and members of the family (as defined in section 2032A(e)(2)) of the transferee have control of such entity.’.

(b) Effective Date- The amendments made by this section shall apply to transfers after the date of the enactment of this Act.

END

 

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This news is courtesy of Roger Brooks and the Association for Advanced Life Underwriting.

The introduction of two estate tax bills - one in the Senate (S. 3284) and the other in the House (H.R. 6499) - enhances the likelihood of ultimate (more probable in 2009 than 2008) estate tax reform.

Senate Bill - $3.5 Million Exemption. Senator Carper (D-DE) introduced S. 3284 with two co-sponsors, Senator Voinovich (R-OH) and Senator Leahy (D-VT). The bill would permanently fix the lifetime estate tax exemption at $3.5 million (indexed for inflation) and the estate tax marginal rate at 45% (essentially freezing the exemption and rate levels slated by the current Revenue Code to be in place in 2009). Significantly, this initiative represents the first time, within our memory, Senators from both parties have co-sponsored such estate tax reform legislation.

House Bill - $2 Million Exemption. Representative McDermott (D-WA), a member of the Ways and Means Committee, has, without co-sponsors, introduced H.R. 6499 which sets the lifetime exemption at $2 million (indexed for inflation) and adopts other major reform approaches, such as gift and estate tax reunification.  Rep. McDermott’s bill would repeal portions of the Economic Growth and Tax Relief Reconciliation Act of 2001 related to the estate tax. Its major thrust would be the adoption of the $2million lifetime exemption, indexed for inflation. The bill would be applicable for all “estates of decedents dying and gifts made after December 31, 2008” and would reunify the gift and estate tax exemption/exclusion amounts. Instead of the applicable exclusion amount for the gift tax being $1 million, it would equal $2 million in 2009 and would be indexed for inflation going forward.

The exclusion amount for the estate tax would also be increased by any unused exclusion from a deceased spouse. This provision (not previously introduced in the current Congressional session, but often described as implementing spousal exemption portability) would allow the surviving spouse to increase his or her exclusion amount by the unused comparable amount of a deceased spouse, if the executor makes an election at the time of the deceased spouse’s death. Furthermore, the exclusion amount could be increased by the unused amount of more than one deceased spouse if the surviving spouse had been married more than once, but the total for each such deceased spouse would be capped at the basic exclusion amount of $2 million, indexed for inflation.

The rate for the estate tax would be 45% for all estates between $1.5 and $5 million, 50% for estates between $5 and $10 million, and 55% for estates over $10 million. Furthermore, the bill would reinstitute the credit for State death taxes and would repeal the deduction for such taxes. The credit was taken away in 2001 and the deduction was put in its place. This bill would restore the credit as it was prior to the 2001 amendment.

S. 3284, the bipartisan co-sponsored bill, would set the exclusion equivalent for the estate tax at $3.5 million, indexed for inflation. The maximum estate tax rate would equal 45%. These levels are known as Freeze 2009. A similar amendment proposal passed in the Senate, 99-1, during the debate on the FY2009 Budget.

In comparison to H.R. 6499, the gift and estate tax exclusions would not be reunified by S. 3284. The gift tax exclusion would remain at $1 million, but with a top rate of 35%. The bill would also simplify the process by which all taxable gifts preceding the decedent’s death are calculated to determine the available credit against the estate tax. It would amend current law, which requires the use of the gift tax rates “at the time of the gifts,” so that the applicable gift tax rates would be those “in effect at the decedent’s time of death.” Sen. Carper’s bill would also require that it be paid for. The provision is titled “Sense of the Senate Regarding Revenue Neutrality” and puts Sen. Carper on record that this bill should, in fact, not add to any federal budget deficits.

The Senate Finance Committee held a hearing on these proposals in April (see our Bulletin No. 08-33), but the House Ways and Means Committee has not had a similar hearing. It is unlikely that H.R. 6499 will pass the House before the November elections, but its existence may flush out Congressional attitudes on amendment proposals.

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Owning real estate in a self-directed IRA can seem like a great way to save for retirement.  However, I have found that most clients want to structure the ownership and/or management of the real estate in such a way that they will run afoul of the prohibited transactions rules.  Once they learn of the restrictions involved, they are not so keen on the idea.  Real estate or business ownership in an IRA can work, but knowledgeable tax counsel should be consulted.  Many attorneys and CPAs are not familiar with the laws regulating self-directed IRAs.

Check out this article by Lynn O'Shaughnessy: Sweat Equity in IRA Real Estate can be no-no

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