House of Representative Action on Estate Tax Revisions
[June 30, 2006]
Susan H. Levin

The U.S. House of Representatives passed an estate tax bill, HR 5638, on June 22, 2006. The bill would raise the federal estate tax exemption to $5 million per individual -- or $10 million for couples. Estates valued at between $10 and $25 million would pay a tax rate of 15 percent - the same as the current rate on capital gains. Estates larger than $25 million would pay a tax rate of 30 percent. The bill also proposes to repeal the change in the step-up in basis rules scheduled to occur in 2010, leaving the law as it is now.

The measure now goes to the Senate for its consideration. A vote could be scheduled later this summer. If the Senate passes the bill, President Bush is expected to sign it into law.

While this change in the federal estate tax law would alleviate the need for many of our clients to do estate tax planning around the federal law, it would not alleviate the need to plan around the Massachusetts estate tax that applies to every resident with an estate of more than $1 million.

With a Massachusetts home worth $500,000 or more, and even minimal retirement, life insurance and savings bank accounts, it is easy to exceed this $1 million threshold. In the case of married couples, planning continues to be possible to defer all estate tax until the surviving spouse’s death and to eliminate all estate taxes if the couple's combined estates do not exceed $2 million. In order to achieve these results, however, it will be necessary to revise estate plans that contain so-called exemption trusts determined by the amount of the federal exemption.

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Here is a summary of the major features of the legislation passed by the House, HR 5638, which is referred to as the Permanent Estate Tax Relief Act of 2006 (PETRA).

Increased Estate and Gift Tax Exemption

• PETRA would increase the federal estate tax exemption amount to $5 million per person (indexed for inflation) effective January 1, 2010.

Lower Estate and Gift Tax Rates

• PETRA would reduce the rate of tax on estates up to $25 million to the capital gains tax rate (currently 15 percent, set to increase to 20 percent in 2011 unless extended).

• The bill would reduce the rate of tax on estates of $25 million or more to twice the capital gains rate (currently 30 percent, set to increase to 40 percent in 2011 unless extended).

Portable Spousal Estate and Gift Tax Exclusion Amount

• PETRA would allow married couples to take full advantage of each individual's $5 million exemption (indexed for inflation) by carrying over to the surviving spouse any unused exemption of the deceased spouse.

Guarantees “Stepped-Up” Basis

• PETRA maintains “stepped-up” basis for property acquired from a decedent by repealing the modified carryover basis rules under the 2001 tax law that would have gone into effect in 2010.

Timber Tax Provision

• A timber provision creates a new 60 percent deduction for qualified timber capital gains.

The text of the legislation is available online at
http://waysandmeans.house.gov/media/pdf/taxdocs/5638text.pdf

A description of PETRA prepared by the Joint Committee on Taxation is available at http://www.house.gov/jct/x-20-06.pdf

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