Now that the full text of HR 3467 (known as "The Sensible Estate Tax Act of 2011"), which was introduced in the House by Rep. Jim McDermott (D-WA) on November 17, has been released, here is brief analysis of this proposed legislation:
- Estate tax exemption and rate - The estate tax exemption, which is now $5 million and is set to increase to $5.12 million on January 1, 2012, would instead be reduced down to $1 million on January 1, 2012. Beginning in 2013 the exemption would be indexed for inflation starting from the year 2000. The estate tax rate, which is now 35%, would be increased to 55% on January 1, 2012.
- Gift tax exemption and rate - The current lifetime gift tax exemption of $5 million and top gift tax rate of 35% would be coordinated with the changes made to the estate tax exemption and rate.
- Portability of the estate tax exemption - In 2011 the concept of portability of the estate tax exemption was introduced, which as it now stands allows married couples to pass on two times the estate tax exemption free from estate taxes ($5 million each in 2011, $5.12 million each in 2012). Under current law portability would disappear on January 1, 2013. H.R. 3467 would make portability permanent, all be it at the reduced estate tax exemption.
- State credit for death taxes - On January 1, 2005, the state credit for death taxes disappeared. Prior to this date this credit allowed states to share in federal estate tax revenues through the concept of the pick up tax. H.R. 3467 would reinstate the state credit for death taxes, which would would make states such as Missouri happy to once again receive this revenue.
- Valuation discounts and minority interest discounts - H.R. 3467 calls for limitations on valuation discounts for certain transfers of nonbusiness assets (meaning an asset that is not used in the active conduct of one or more trades or businesses). This will include allowing no valuation discounts for transfers with respect to nonbusiness assets and no valuation discounts for minority interests if the other owners are family members. These provisions of H.R. 3467 would be effective on the date of enactment.
- Basis reporting - H.R. 3467 provides that the basis of property acquired from a deceased person as set forth in Internal Revenue Code Section 1014 must equal the value of that property for estate tax purposes, and the basis of property received through a gift must equal the giftor's basis as determined in Internal Revenue Code Section 1015. These provisions would be effective for transfers for which returns are filed after the date of enactment.
- Grantor Retained Annuity Trusts - H.R. 3467 would require a Grantor Retained Annuity Trust to have a minimum 10 year term; the annuity payment may not be reduced from one year to the next during the first 10 years of the term of the trust; and the remainder interest at the time of the transfer of property into the trust must have a value greater than 0. These provisions would be effective for transfers made after the date of enactment.
- Generation-skipping trusts - H.R. 3467 would require a generation-skipping trust to be terminated 90 years after the trust is established. This provision would apply to trusts created after the date of enactment and to transfers made to pre-existing trusts if the transfer is made out of principal added to the trust after the date of enactment (subject to grandfathering exceptions).
H.R. 3467 is in sharp contrast to H.R. 1259 (known as "The Bipartisan Death Tax Repeal Permanency Act"), which was introduced by Rep. Kevin Brady (R-TX) at the end of March and would completely repeal the estate tax and generation-skipping transfer tax and make the current $5 million gift tax exemption and 35% top gift tax rate permanent.
Note that both bills are not law. They are only at the beginning of the legislative process. H.R. 3467 currently has one co-sponsor while H.R. 1259 currently has 188 co-sponsors. My guess is like everything else before Congress, neither will pass.