Latest estate tax update from the Association Of Advanced Life Underwriting

By Michael Gray

MEG Financial


Democratic leadership in the Senate has begun to mark its position on expiring year-end tax provisions by introducing draft legislation calling for temporary extensions of tax relief for middle-class taxpayers (taxpayers earning $250,000 or less).

The estate and gift taxes were addressed in the initial draft, but were later eliminated as narrower strategy on year-end taxes was adopted. Nonetheless, the markers established in the initial draft are highly encouraging and reflect the consistent advocacy by the AALU in pursuit of permanent estate and gift tax reform that maintains unified lifetime exemptions.

The original draft bill, introduced by Majority Leader Harry Reid (D-NV) and developed by Senate Finance Committee Chairman Max Baucus (D-MT), proposed $3.5 million lifetime exemptions and a 35 percent top tax rate — maintaining unified lifetime credits against the estate and gift taxes — and also included portability of unused credit, indexing for inflation, and a fix to the potential “clawback” issue that has previously caused concern amongst the estate planning community.

These provisions were stripped from the legislation as Democratic leadership stated its intent to focus solely on “middle-class tax relief.” It is likely that the political sensitivity around these issues led to their removal — particularly for several senators in challenging campaign fights in moderate states. While this result is not ideal, the most important takeaway from this exercise is that the Democratic leadership and the top tax-writers and senior staff of the Finance Committee have made policy judgments on the estate and gift taxes that are largely consistent with the AALU’s.

Even with the removal of the estate and gift taxes from the Democratic draft, it is possible that the Senate could vote on a clean, one-year extension of all Bush-era tax cuts — which would include the estate and gift taxes — in the form of an alternative bill offered by the Minority Leader Mitch McConnell (R-KY) and the top Republican on the Finance Committee, Sen. Orinn Hatch (R-UT). Nonetheless, we continue to expect meaningful action to occur on the estate and gift taxes in the post-election lame duck session. However, these recent developments are a positive indication of where Senate negotiations may begin when that time comes.

Lastly, as we have previously reported, the House Republican leadership is still scheduled to push a vote next week on legislation to address expiring taxes for one year that will include current estate and gift tax policy enacted in 2010 ($5 million exemption/35 percent rate with unified estate and gift tax credits). That legislation is not expected to be taken up by the Senate if it clears the House.