Sapers & Wallack

1. What is the Congressional Schedule and will there be a near-term patch?

Given the crowded schedule, it’s no wonder Congressional tax-writers have recently indicated that an estate tax resolution will not occur in the near future.  The Senate reconvened late January and the first item on the legislative agenda focused on a contentious debt limit increase.  In the near-term, the Senate will spend time mopping up legislation that was merely patched through the middle of February – including COBRA, unemployment insurance, the Patriot Act, and highway funding.   Any “spare” time is likely to be focused on re-calibrating a health care bill and addressing jobs and tax extenders legislation, which was also carried over from last year.  Thus, the Senate will be hard-pressed to find time to address the estate tax before March.

After President’s Day recess (2/14 – 2/20), the Senate will have roughly a six-week work period before Spring/Easter recess (3/28 – 4/3).  If health care legislation is finished, floor time will likely be spent on the FY 2011 budget, jobs legislation, and perhaps a financial services reform bill.  Senate Banking Committee Chairman Christopher Dodd (D-CT) would like floor action in the early part of the year, and, as the administration continues to centralize their focus on Wall Street, executive compensation, and regulation of large financial institutions, there may be increased pressure to move earlier on these agenda items.

2. What is the most likely outcome for the estate tax and when are we likely to see action?

Currently, the most likely scenario is a two-year patch of 2009 law ($3.5 million / 45%), passed mid- to late-summer as part of a larger tax package, perhaps under reconciliation instructions requiring only 51 votes.

The Senate tipped its hand of how it plans to address the estate tax during the debt limit increase debate.  Within this debate, several members insisted that a deficit reduction panel be commissioned to investigate solutions for our long-term fiscal problems, most notably through entitlement and tax reform. In order to reconcile differences amongst members, the White House agreed to implement an 18-member deficit reduction panel via executive order, contingent on the adoption of an amendment offered by Majority Leader Harry Reid (D-NV) which imposes pay-as-you-go requirements, but exempts several items for specified time periods, including an extension of the estate tax for two years.  Under this agreement, no cost associated with an estate tax extension at 2009 levels ($3.5 million / 45%) inside of this two-year window would require revenue offsets.

As indicated above, the Senate schedule is cluttered with several legislative priorities dominating floor time through Easter recess.  Among these priorities is the Congressional budget for FY 2011.  The President is expected to send his budget to the Hill around February 1.  Thereafter, the budget committees will work through and send their budgets to the floor around April.  Throughout May and June, the differences in the budgets will be reconciled and Congress will decide how they plan to shape tax legislation.  Most notably, the 2001 and 2003 tax cuts, including the estate tax, and it is likely reconciliation instructions will be written for tax bills to ensure the Senate can pass certain extensions.

The likelihood of passing a tax bill under regular order has been reduced by the recent election of Scott Brown in the Jan. 19 Massachusetts special election, which leaves the Democrats with one vote shy of the 60 vote supermajority needed to pass tax legislation in this manner. Additionally, several key Democratic swing votes on the estate tax continue to favor a higher exemption and lower rate than 2009 levels ($3.5 million / 45%).  These factors combine to increase the probability of needing reconciliation instructions to pass a tax bill in 2010, and we may see a bill passed mid-summer.

3.   How likely is it that an estate tax patch would be applied retroactively?

There is a big question mark around retroactivity, and as Congress continues to defer a decision on the estate tax – the later we get into 2010 – the more difficult it will be to reinstate the tax retroactively to January 1.

Although there is precedent to support retroactivity (see our Bulletin 09-141), it is an open question whether lawmakers would take this step and potentially trigger litigation that could ensue, particularly in an election year.  Complicating matters further, Senate Finance Chairman Max Baucus (D-MT) has indicated his agreement with retroactive tax changes, whereas House Ways and Means Chairman Charlie Rangel (D-NY) has made statements in opposition.  Additionally, the amount raised by patching the estate tax at 2009 levels is nominal and if Congress addresses the estate tax in the near-term, they may choose the “path of least resistance” and not impose the tax retroactively, merely patch it going forward.

4. If the Senate does not address the estate tax with a two year patch at 2009 levels, what are other potential reform scenarios?  What will be the levels, rates, and will it be permanent?

Another potential scenario is that repeal remains in effect throughout 2010, followed by a reversion in 2011 to the law in place in 2000, with a $1 million exemption and 55% top rate.  With all eyes on the economy and the call for deficit reduction, as well as the pressure of the November 2010 elections, the Senate may be hard pressed to find the time and the votes needed to address the estate tax as a stand alone measure or within other legislative vehicles.   Furthermore, given growing concerns over debt and deficits, the cost of patching or permanently reforming the estate tax ($233 billion over ten years at 2009 levels) could play into the decision to allow the tax to sunset to pre-2001 levels.

Another possible scenario is that the Senate addresses permanent estate tax reform.  Although this scenario is unlikely, because of cost concerns, a crowded congressional agenda, and political pressures from upcoming elections, such an agreement would be at a higher exemption then $3.5 million and a lower rate than 45%.  This would be the only way the Senate would garner the 60 votes in favor of permanent estate tax reform, if done under regular order, because of the ten Senators who voted in the FY 2010 budget for the Lincoln/Kyl amendment of $5million/35% and clearly want more then Freeze 2009.  Some of the cost cutting options could include a 5% surtax on the wealthy, valuation discounting limitations (as seen in Rep. Earl Pomeroy’s (D-ND) bill, H.R. 436), and changes to the requirements for GRATs (for more information see our Bulletins 09-50 and 09-63).  Other possible elements of permanent reform could include reunification, portability, indexing for inflation.  This scenario is unlikely, and could be derailed by a potential discretionary spending freeze, which is rumored to be a component of the President’s upcoming budget proposal.

5.   What are the policy implications of the three aforementioned scenarios for AALU members and their clients?

The AALU Business Insurance and Estate Planning (BIEP) committee recommends policy to the AALU board, with primary consideration to the interests of AALU members and those they serve.   The committee has met frequently with counsel and staff to discuss the best results that can be achieved and strategies which can be used.  In general, AALU’s judgment remains consistent  with its long-standing view—that sustainable reform that will enable clients to plan with certainty is the primary goal, and we believe that a $3.5 million exemption and a 45% top rate is sustainable.  In addition, reunification with a gift tax exemption amount also set at $3.5 million would be extremely beneficial to clients and significantly enhances opportunities for effective estate planning with life insurance. We continue to gather data on the impact of the possible political scenarios above and will be reaching out to you as part of that process.

1. What types of beneficial communications has AALU and will AALU be providing our membership to ensure best in class representation and technical guidance to use with your clients and centers of influence?

In short, Washington Report Bulletins, a legislative Teleseminar in early February, and a technical educational webinar in February.

In addition to the Washington Report Bulletin 09-141, sent out before 2010 – profiling tax laws in repeal, issues to review with your clients, and potential planning opportunities – the AALU BIEP committee suggested that we develop other materials about considerations—including issues, potential problems and opportunities—that can be used by AALU members as a checklist of matters to discuss with clients and their technical advisors. AALU counsel will be preparing the Checklist in a Washington Report Bulletin.

Any AALU member who wishes to obtain a copy of any of the items discussed in this Washington Report may do so through the following means: email Anthony Raglani at raglani@aalu.org and include a reference to this Washington Report.