The NASE supports permanently raising the threshold of the estate and gift tax exemption to a minimum of $5 million, to bring relief to micro-businesses and small farms.

Background:
The underlying objectives of the estate and gift tax exemption are that they serve a “wealth equalizing function” and create revenue. By taxing those families of decedents that have more than $1.2 million, the goal is to reduce the wealth of the younger generation, leveling the playing field and redistributing economic power.

After the minimal exemptions designated by the tax code, families could pay up to 55 percent in taxes on the transfer of their estates, which includes land, buildings and equipment. Due to this tax, one-third of all small business owners will have to either liquidate part of their business or sell outright to pay estate taxes. Only six out of ten family businesses get passed on to a second generation, and only one out of ten make it to the third generation.

Not only is the estate tax debilitating to a small business when its owner has passed away, but the cost that owner must expend to prepare for the estate tax is also a burden that drains the business’s resources. Money spent on estate tax planning measures could have been reinvested into the company. Moreover, estate tax liability considerations frequently affect business decisions about investments and expansions.

Legislative Activity:
President Bush’s tax plan, the Economic Growth and Tax Relief Reconciliation Act of (H.R. 1836) became law in 2001. It contained provisions which phased out estate, gift and generation-skipping taxes (GST) over 10 years by gradually lowering marginal estate tax rates and increasing the federal estate tax exclusion, also called the unified exemption.

The new law eliminates the highest marginal estate, GST and gift tax rates (those over 50 percent) in 2002, and also repeals the 5 percent surtax. It reduces the top marginal estate tax rate by 1 percentage point each year from 2003 through 2007, leaving it at 45 percent until 2011. In 2011, all estate and generation-skipping marginal rates will be repealed, and the top gift tax rate will be left at 40 percent.

The measure also changes the way capital gains are taxed. After 2011, individuals inheriting property worth more than $1.3 million will see that property valued on a "carry-over" basis, meaning it would be taxed based upon its value when it was acquired by its original owner. But individuals inheriting property worth up to $1.3 million will face capital gains taxes calculated on the existing "step-up" basis, meaning it would be taxed based upon its value when the person received it. The measure also allows a surviving spouse to exempt up to $4.3 million from the capital gains tax.

Legislation to make permanent the repeal of the estate tax that was passed in the Bush Administration’s tax plan was introduced in the 109th Congress. The House passed the Permanent Death Tax Repeal Act of 2005 (H.R. 8) in April 2005 with a vote of 272-162. This bill was defeated when the Senate could not invoke cloture with a vote of 57-41.

The House then passed a compromise bill, the Permanent Estate Tax Relief Act (H.R. 5638), by a vote of 269-156. This bill would have increased the exemption amount to $5 million per person as of January 1, 2010. The exemption would be indexed to inflation. The bill would also have reduced the tax rate for the capital gains tax on estates worth up to $25 million, which is currently 15 percent but will increase to 20 percent in 2011. Estates worth $25 million or more would be taxed at twice the capital gains rate. This bill was also defeated when the Senate again failed to invoke cloture.

In a final attempt the House Republican leaders put together a package which included numerous expiring or expired tax breaks that are popular, a Democrat-supported minimum wage increase and a permanent estate tax reduction (HR 5970.) The compromise would have phased in the permanent reduction, increasing the exemption level by 2015 to $5 million for an individual’s assets or $10 million for a couple. The House passed the bill but yet again, the Senate was unable to get the votes it needed to move forward on this issue.

In the 110th Congress, it is unlikely with the new majority that the issue of estate tax repeal or making permanent the increased exemption limits.

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