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Are Estate and Gift Tax Benefits In Jeopardy?

October 12, 2011
By: Scott P. Borsack

“The Administration remains opposed to the extension of these high income tax cuts past 2012 and supports the return of the estate tax exemption and rates to 2009 levels.” This one sentence from an 80-plus page document entitled, “Living Within Our Means and Investing In the Future: The President’s Plan for Economic Growth and Deficit Reduction” released a few weeks ago by the Office of Management and Budget – an office within the White House – has largely gone unnoticed. Similar language appears in the Democratic wish list for members of the Congressional Super Committee charged with proposing trillions of dollars in tax savings by the coming Thanksgiving holiday. From these two pronouncements one might conclude that Democrats wish to eliminate the second year of the “tax holiday” created by the 2010 Tax Act. Before drawing any conclusions, some background is in order.

This past December, with the country facing a return to tax rates that existed in 2001 as the result of the automatic repeal of the "Bush Era Tax Cuts," President Obama and the United States Congress enacted the 2010 Tax Act which temporarily extended the current 35% maximum income tax rate, continued the 15% tax rate on dividends and long term capital gains and also contained some surprising changes to the federal estate and gift taxes.  Like the 2001 changes before it, the 2010 Tax Act sunsets on December 31, 2012 so that if there are no further changes to the law, the rates which existed in 2001 will apply in 2013 and beyond. The 2010 Tax Act increased the federal estate and gift tax exemption to $5 million ($10 million for a married couple) and provided that unused portions of the exemption could be moved between spouses upon the death of the first of them. Additionally, the rate of tax was reduced from 45% to 35%.  I say this was a surprise because no one was really expecting anything more than an extension of the $3.5 million estate tax exemption regarding estate and gift taxes. The change to the gift tax was wholly unexpected. With this new and larger gift tax exemption, many taxpayers with the means to do so made significant gifts to either take advantage of the exemption, the lower tax rate, or both. Some have already made these gifts and others are contemplating completion before the end of the year. Still others may be watching and waiting for next year and plan to make a final decision before December on whether or not to make a gift. With these two pronouncements, some may wish to reconsider waiting until next year.

Taken literally, both the Office of Management and Budget report and the Democrats on the Congressional Super Committee seem to support a return to the law as it existed in 2009. In 2009 there was a $1 million gift exemption and a $3.5 million estate tax exemption. The maximum tax rate for estates was 45% and for gifts a lower 35% rate applied. The pronouncements both speak of  “exemption for estates” and make no mention of the gift tax. Since the estate and gift taxes were decoupled in 2009, we might read into this that only the estate tax was meant to be addressed. Commentators have since suggested that what the authors intended was a return to 2001 levels for both the estate and gift taxes. Several weeks have passed since the wish list and the report were released but we have seen no correction or revision to either. I am not sure what if anything to read into that. Might this be offered as a red herring, or bargaining chip to be conceded at some later time? Again, all we have is speculation.

We cannot forget that the 2010 Tax Act was the product of a Democratically-controlled Congress then controlled by Democrats with one of their own in the White House. In order to secure enough votes in the Senate for an extension of unemployment benefits, the President had to offer up something to the Republican minority, and the extension of the Bush Era Tax Cuts was the likely quid pro quo. However the enlargement of estate and gift tax benefits was hardly contemplated, and likely seen by Republicans as a windfall. It remains to be seen how Republicans will respond to attempts to reduce tax savings secured as part of a prior economic package, where those benefits expire of their own accord 12 months later. That is not to suggest that we believe that these proposals are dead on arrival. We merely suggest that the changes made by the 2010 Tax Act a few short months ago seem unlikely targets. The report of the Super Committee is due next month. We shall soon see if Democrats are serious and whether Republicans will hold onto recently won gains.

If you were contemplating a gift in 2012, at the very least you may wish to keep a close watch on Washington in the next few weeks. A change in the political winds may signal that it is time for fast action. We will continue to provide updates as circumstances warrant.

If you would like to discuss how any of these changes may affect your business or personal income tax situation, or have any other tax or estate planning questions, please contact, Scott Borsack (215.864.7048).

IRS Circular 230 Notice:  To ensure compliance with certain regulations promulgated by the U.S. Internal Revenue Service, we inform you that any federal tax advice contained in this communication (including any  attachments) is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1) avoiding tax-related penalties under the U.S. Internal Revenue Code, or (2) promoting, marketing or recommending to another party any tax-related matters addressed herein, unless expressly stated otherwise.

This correspondence should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult a lawyer concerning your own situation and legal questions.
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