Super Committee Rumor on Gift Tax Replaced by Proposed Legislation

Originally Published on forbes.com on November 26th,2011

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The rumor which swept the estate planning community that the Super Committee might call for an early rollback of the gift tax exemption from $5,000,000 to $1,000,000 effective November 23 turned out to have no foundation.  I reported the rumor last week and followed up with a piece that indicated that the rumor had some of the attributes of an urbanlegend.  In my experience, the effect of the rumor was salutary.  A couple of things that were going to get done anyway got done a little sooner.  The question is whether everybody should just relax for another year so we can replay the drama next November or December but with quite a bit more intensity.  The greater intensity would come from the fact that the exemption drops to $1,000,000 on January 1, 2013 based on current law.  The idea that Congress might have done something in the next couple of weeks with a retroactive effective date was probably kind of preposterous.  The idea that Congress will do nothing for the next year is much more plausible.  So should you just wait and see ?

I think not.  While the rumor was circulating Congressman Jim McDermottintroduced the:

“Sensible Estate Tax Act of 2011” to restore fairness to the estate tax. It is the first estate tax reform bill introduced by a member of the tax-writing committee that does not simply extend or repeal the existing estate tax law.

The McDermott bill would bring the estate tax rates back to the pre-2001 levels, levels that worked and helped drive growth for all Americans, with a maximum marginal rate of 55% and a $1 million exemption ($2 million for married couples) – both would be indexed for inflation beginning in 2000. Current law allows for a $5 million exemption at a maximum rate of 35%, which allows over 99% of estates to pass tax-free.

Inflation indexing is not one of my specialties, but if I am reading this tableand doing the math right the indexing from 2000 would make the exemption about 1.3 million. The bill will also attack family limited partnerships and GRATs.  Assets other than business assets in a family limited partnership would be considered to be directly transferred.  Minority discounts will be disallowed.  GRATs will not be able to have a 0 remainder value and will have to run 10 years.  For those of you with dynastic plans the GST exemption will only be good for 90 years.

The political calculus in this is interesting.  The Tea Party did a great job of grabbing populist sensibilities and distrust of the establishment from an anti-tax perspective.  Occupy Wall Street has changed that equation.  Mother Jones might project that Congress is aligned with the 1%, but they do that by noting that the average net worth of a congressperson is $912,000, which is less than $1,000,000.  Would they really have that much trouble throwing minority discounts for family limited partnerships under the bus ?

The bill would be effective December 31, 2011.  Remember if nothing is done by Congress in the next year the exemption rolls back to $1,000,000 at the the end of 2012.  Now may be the time to act.