Estate Tax Reform – Legislative Update

Estate Tax Reform – Legislative Update

Issue
The money and property a person owns when he or she dies (that is, a person’s estate) might be subject to the federal estate tax. Rep. Earl Pomeroy (D-N.D.) introduced H.R. 436, the Certain Estate Tax Relief Act of 2009, on Jan. 9, 2009. H.R. 436 1) permanently retains the estate tax with the exemption level applicable during 2009 and 2) eliminates valuation discounts for closely held businesses.

Taxpayers Potentially Affected
Without congressional action, the estate tax exemption will revert to $1 million in 2011. Therefore, individuals with estates greater than $1 million might be affected by changes (or lack thereof) to the estate tax law.

Background
H.R. 436 was introduced to permanently maintain the estate tax exemption level at $3.5 million. The legislation also would freeze the estate tax rate at 45 percent. The legislation would result in an estate tax policy that is similar to the policy President Barack Obama proposed during the presidential campaign, except that he proposed to index the estate tax exemption level with inflation.

The proposed legislation also eliminates the use of minority interest discounts for valuing transfers of nonbusiness assets (assets that are not used in the active conduct of one or more trades or businesses). The elimination would be effective for transfers after the legislation is signed by the president. Minority interest discounts are valuation adjustments on the transfer of assets or stocks that reflect the lack of control that an individual owner with a minority interest has on the business’s operations. In general, minority interest discounts typically range from 20 percent to 30 percent of the value of the transferred assets. However, each situation is unique and based on a number of factors.

Just three days after the legislation was introduced, the U.S. Chamber of Commerce urged President Obama to completely repeal the estate tax to help boost the struggling economy. As a result, there is uncertainty about whether H.R. 436 will be passed in its current form, amended, or rejected altogether by Congress. It is highly probable, however, that a revision to the current laws will be passed in some form prior to the end of 2009.

Given this uncertainty, any individual considering estate planning that involves the use of minority interest discounts should move forward with those plans immediately.

Contact Information
If you have any questions, comments, or concerns about minority interest discounts or H.R. 436, please contact Sally Day at 574.239.7826 or sally.day@crowehorwath.com.

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Under U.S. Treasury rules issued in 2005, we must inform you that any advice in this communication to you was not intended or written to be used, and cannot be used, to avoid any government penalties that may be imposed on a taxpayer.