The Lawletter Vol 34, No 12, December 7, 2010
Anne Hemenway—Senior Attorney, Commercial Law
With the November elections behind us, the lame-duck Congress is back in session and will likely be anything but "lame-duck." Among the most important legislative agenda items to take up before the end of the year is the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA"), Pub. L. No. 107-16, 115 Stat. 38 (June 7, 2001). While numerous tax changes were made under this Act, the fate of the estate tax is one of the most perplexing.
The intent of EGTRRA, which was signed by President Bush on June 7, 2001—months before the 9/11 attacks and the wars in Afghanistan and Iraq—was to reduce taxes. As most Americans know by now, however, EGTRRA went further and actually eliminated certain taxes altogether, significantly reducing federal revenue. Extensive changes were made to the income, estate, gift, and generation-skipping transfer tax provisions in the Internal Revenue Code. Under EGTRRA, the exclusion amount for estate tax purposes was increased in stages.
By 2009, the exclusion amount had increased to $3.5 million, meaning that up to $3.5 million of a decedent's estate was not taxed at all. In 2010, the estate tax under EGTRRA was repealed altogether. This means that the estates of individuals dying in 2010 can pass estate-tax-free. Equally remarkable is the fact that EGTRRA contains a sunset provision, under which the entire Act, including the repeal of the estate tax, is scheduled to expire as of December 31, 2010, whereupon all of the tax provisions in EGTRRA will revert to the way they were prior to June 7, 2001. Beginning in 2011, therefore, a federal estate tax of 55% will be assessed on estates of more than $1 million unless Congress takes some action.
To date, while there has been debate in both houses of Congress and numerous bills have been introduced about what to do with the fast-approaching expiration of EGTRRA, no legislation has yet been passed by Congress. In December 2009, the House of Representatives passed the Permanent Estate Tax Relief for Families, Farmers and Small Businesses Act of 2009, H.R. 4154, 111th Cong. This bill, which has the backing of the Obama Administration, would repeal certain sections of EGTRRA, including the repeal of the estate tax and the modified carryover basis. Instead, it would retain the estate and gift tax provisions in place in 2009 and bring back the step-up basis provision in effect in 2009.
The bill also eliminates the EGTRRA sunset provision as it applies to the estate and gift tax provisions. See Bill Summary & Status, H.R. 4154, 111th Congress (2009–2010), http://thomas.loc.gov/cgi-bin/bdquery/z?d111:h.r.04154:. This would mean that beginning on January 1, 2011, a 45% tax rate on estates of more than $3.5 million would be reinstated. See George G. Bogert & George T. Bogert, The Law of Trusts and Trustees § 1031 (2010). Even if the Senate fails to pass the House bill during this lame-duck session, commentators and Hill observers have consistently reported that Congress is likely to pass a one-year extension of the estate tax at the 2009 level and take up the matter in January 2011 with the new Congress.