December 31, 2009

On December 3rd of this year, House lawmakers approved the Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Bill of 2009 (H.R. 4154) by a vote of 225 to 200. That measure would have capped the tax at its current rate, with a $3.5 million exclusion. Democratic leaders in both houses had initially planned to attach a short-term extension to the Department of Defense appropriations bill (H.R. 3326). However, they abandoned that plan when it became clear that the Senate did not have the 60 votes needed to pass the legislation.  Senate Finance Committee Chairman Max Baucus attempted on December 16 to pass a three-month extension at current levels by unanimous consent. The Republicans objected to the move, making unanimous consent impossible. Barring some reversal this year, this congressional stand-off means the estate tax will drop to zero for the first time in decades on New Year’s Day –which could also expose smaller estates to capital gains liabilities from which they are currently protected.

It is still likely the Senate will act in early 2010 ensuring no person will escape the estate tax.  The Senate will potentially enact legislation or promulgate a retroactive statement which will change or extend current law. A retroactive tax fix would likely raise many complications, especially if lawmakers wait too long to enact it.  The constitutionality of such a fix is questionable; however many U.S. courts, including the Supreme Court, have historically defended retroactive taxes. 


Currently,  estates larger than $7 million per couple or $3.5 million for individuals are subject to the estate tax.  If Congress does not act, those under that threshold will be hit with the following major tax changes:

  • Estate and generation-skipping transfer (GST) taxes will be repealed for 2010;
  • Gift tax will be retained with a top rate of 35 percent and an exclusion amount of $1 million;
  • The stepped-up basis at death rules will be repealed and replaced with modified carryover basis. The recipient of the bequeathed property will receive a basis equal to the lesser of the adjusted basis of the property in the hands of the decedent, or the fair market value of the property on the date of the decedent's death;
  • Executors will be able to increase the basis of estate property by up to $1.3 million, or $3 million in the case of property passing to a surviving spouse. Thus, an estate will be allowed to increase the basis of property transferred to a surviving spouse by as much as $4.3 million. However, the basis of an asset cannot be adjusted above its fair market value at the date of the decedent's death; and
  • Executors of estates will also be required to report certain details relating to transfers at death of non-cash assets in excess of $1.3 million and appreciated property received by the decedent within three years of death for which a gift tax return was required to be filed.

Many tax provisions will be expiring at the end of next year – see the CNBC article below.   NCBA will continue to be your voice of reason on tax matters in Washington and we will continue to monitor these issues and get you updates as they occur. 

View the Congressional Budget Office brief of the estate tax.