Senate Panel Mulls Reform of Estate Tax Rules

By Jeff Carlson, Washington Staff Writer

By all indications, the Senate Finance Committee is serious about reforming federal estate tax rules. Chairman Max Baucus (D-Mont.) held a third hearing on the subject on April 3, 2008, ostensibly to get input from experts on where change is most needed in four areas: liquidity, portability, unification of gift and estate taxes, and charitable giving.

Prior to the 2001 tax changes, the gift and estate taxes were unified with a single graduated rate schedule and combined into a single unified credit.  Under current law, the amount that transferors can transfer tax-free while alive is substantially less than the amount that they can transfer tax-free at death. Panelists and lawmakers were in agreement that unification is necessary.

Speaking on behalf of the American Institute of Certified Public Accountants (AICPA), Roby B. Sawyers, a practicing CPA and professor in the College of Management at North Carolina State University, took it one step further, suggesting that the estate, generation-skipping transfer (GST), and gift tax exemptions be re-unified.

“Reunification will simplify planning for taxpayers and avoid all the cumbersome number juggling now required, provide an incentive for small business owners to make business succession plans, and provide an incentive for taxpayers to make intrafamily transfers of wealth during life,” stated Sawyers. And if the estate tax and GST tax are permanently repealed, Sawyers said the AICPA “encourages Congress to reunify the estate and gift taxes during any phase-out period and repeal the GST tax immediately.”

Allowing portability, or the transfer of a deceased spouse’s unused exemption to the surviving spouse, also met with approval by lawmakers and panelists. “In my view, portability may be the best estate tax planning idea for a surviving spouse since the unlimited marital deduction in 1981,” stated Shirley L. Kovar, Fellow, American College of Trust and Estate Counsel Chair, Transfer Tax Study Committee.

Kovar claimed that portability would simplify transfer tax planning, satisfy client desires to provide security and flexibility for surviving spouses, achieve greater consistency with existing tax policy that treats a married couple as a unit, and accomplish by statute the same result that a married couple may achieve by complicated planning and estate administration. No one on the panel disagreed.

Dennis I. Belcher, a partner with McGuire Woods LLP, called on Congress to modernize estate tax rules addressing installment payments, saying that business owners have changed the way they do business since the installment payment provision was enacted in 1976. Belcher recommended amending the definition of closely held business under the installment payment provision to make it clear that all forms of business qualify for the benefits of the installment payment provision. And provide for the consistent application of the requirements under the installment payment provision regardless of business form.

Baucus, for his part, seemed surprised at the panelists’ calls for “tweaking” the current laws rather than making major changes. In his opening statement he gravely noted: “We seriously need reform,” but the panelists’ apparent lack of fire was disconcerting.

Nevertheless, the five lawmakers present at the hearing were anxious to let the public know they were going to take action. Senate Minority Leader Jon Kyl (R-Ariz.) informed panelists that lawmakers had some ideas of their own and were looking at a unified estate tax credit, lower estate tax rates, and “some” technical changes. Specifically, Kyl said the Committee was considering raising the tax credit to $5 million, or indexing it to inflation, and taking homes out of the equation.

Belcher called the ideas “well worthy of implementation,” with the exception of removing homes from the equation. Kovar agreed, saying the home exception would not be equitable to all taxpayers.

Senator Pat Roberts (R-Kan.) wondered if Congress should make changes to the “reasonable cause” provision in estate tax rules for extension of installment payments. “Rarely used,” replied Belcher, who explained that the law already allows for four years of interest only payments which he said gives families of the deceased plenty of time to finalize their estate plans.

Senator Ken Salazar (D-Colo.) asked if targeted relief would be helpful. Sawyer claimed that targeted relief can be “problematic and unfair,” and that lawmakers could better serve the public by focusing on increasing the estate tax exemptions and portability.

Senator Blanche Lincoln (D-Ark.) informed the panelists that the Committee should consider changes to estate tax law in order to make it “more predictable and viable.” Belcher responded that it was not necessary, telling Lincoln that Congress should focus on exemptions and tax rates versus complexity in the code. Lincoln responded that the Committee would digest the panelists’ suggestions and soon begin drafting estate tax reform legislation.

“Hopefully, your ideas will give us some momentum,” added Kyl.

Posted April 15, 2008.