Articles

October, 2006

“Trifecta” Bill Rejected By Senate

The Estate Tax and Extension of Tax Relief Act of 2006, popularly known as the “Trifecta” bill because of its combination of provisions relating estate tax reform with extensions of expired or expiring tax breaks and an increase in the federal minimum wage (the “Bill”), passed the U.S. House of Representatives by a vote of 230-180 on July 29, 2006. However, like numerous predecessor estate tax reform bills, the Bill was rejected by the Senate. While it is uncertain whether the current Congress will again take up estate tax reform, the transfer tax-related provisions of the Bill may serve as a starting point for any future legislation. The following is a summary of these provisions.

  • Unified estate and gift tax exemption . Under the Bill, the exemptions for the estate and gift taxes are re-unified starting in 2010. The exempt amount is $3.75 million in 2010 and rises to $5 million in 2015. The bill did not change the exempt amounts applicable through 2009 under current law. A table summarizing the exempt amounts for years starting in 2010 is included below.
  • Rates . The first $25 million of an individual’s taxable transfers, which are generally defined to include an individual’s taxable gifts and taxable estate, are subject to estate or gift tax at the federal long-term capital gains rate (currently 15% and scheduled to rise to 20% after 2010). Cumulative taxable transfers in excess of $25 million are taxed at a higher rate (40% in 2010, falling to 30% in 2015). Consistent with current law, the generation-skipping transfer tax rate for a given year is equal to highest estate and gift tax rate in effect for such year. The table below summarizes the exempt amount and the highest estate and gift tax rates in effect starting in 2010.

 

Year

Basic exclusion amount

Highest estate and

gift tax rates

2010

$3.75 million

40%

2011

$ 4 million

38%

2012

$4.25 million

36%

2013

$4.5 million

34%

2014

$4.75 million

32%

2015

$5 million

30%

Years after 2015

$5 million indexed for inflation

30%

 

  • “Portable” estate and gift tax exemption for spouses . The amount of any estate and gift tax exemption remaining unused at the death of an individual dying after December 31, 2009 is generally available for use by his or her surviving spouse if the decedent’s executor elects, on a timely filed estate tax return, to permit the surviving spouse to use it. The surviving spouse is entitled to use this exempt amounts in addition to his or her own exemption. The Bill does not provide for similar inter-spouse “portability” of the generation-skipping transfer tax exemption.
  • Repeal of state death tax deduction . The deduction for state death taxes is repealed for estates of decedents dying after December 31, 2009. The credit for state death taxes that was in effect for decedents dying prior to December 31, 2004 is not reinstated.