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This week’s newsletter comes to you from one of our State Representatives, Brad Barth of Barth Berus & Calderon, LLP.  The purpose of Brad’s letter is to alert you to some of the consequences of legislation HR 436 IH entitled Certain Estate Tax Relief Act of 2009.  Aside from a possible extension of the $3.5 million per-person exemption, the Act is set to introduce some new rules that may have serious negative consequences.

While an extension of the $3.5 per-person exemption sounds like a good idea at first glance we must also consider some of the consequences of HR 436 IHHR 436 IH will have negative consequences on your estate plan as far as valuation discounts are concerned.   It may also harm charities by decreasing charitable donations; charitably inclined or not, many of us use donations to charitable organizations as a tax reduction tool.

With the current state of the economy right now if you are considering using valuation discounts and gifts to charities as some of your estate planning and tax reduction tools, the time to act is now!  Brad’s article explains the consequences further so, please, read his article, Estate Planning With Uncertain Tax Laws: The Uncertainty Within the Certain Estate Tax Relief Act of 2009 and  take the steps that need to be taken if you wish to take advantage of the some planning tools that may be lost with the passage of HR 436 IH.

The Uncertainty Within the Proposed Certain Estate Tax Relief Act of 2009 [2009-01-27]

Bradley G. Barth

The Uncertainty Within the Proposed Certain Estate Tax Relief Act of 2009
Former President George W. Bush’s enactment of the Tax Act of 2001 introduced a considerable amount of uncertainty into the estate planning process. Under current law, the basic Federal Estate Tax Exemption (the “Exemption”) for 2009 is $3.5 million and the top estate-tax rate is 45%. Next year, the tax is scheduled to disappear entirely – only to reappear in 2011 with a $1 million Exemption and a top estate-tax rate of 55%.

You might be sitting there reading this article with a confused look on your face, similar to the look I get each time I explain this tax scheme to my clients. What is so special about the year 2011 which justifies such a drastic reduction in the Exemption from “unlimited” to $1 million per person with an estate-tax rate of 55%? In year 2011, the first baby boomers reach age 65 and become entitled to Social Security and Medicare. The demands on the Treasury in the years that follow will be substantial. A look at recent history tells us that when demand for government services rise, increased taxes are almost certain.

The first estate tax was enacted in 1797 to fund the formation of the American Navy, The Revenue Act of 1862 was used to fund the Civil War, and again in 1898 to pay for the Spanish-American War. These were all repealed a few years later. Our current law was enacted in 1916 and is scheduled for repeal in the year 2010. However, President Barack Obama and congressional leaders are moving quickly to block the estate tax from disappearing in 2010. New legislation HR 436 IH entitled “Certain Estate Tax Relief Act of 2009” (the “Act”) was introduced into the House of Representatives on January 9, 2009. The Act extends this year’s $3.5 million per-person(1) Exemption and the 45% top estate-tax rate into future years. Under the Act, all but the largest estates (fewer than 2% of annual deaths) would escape taxation.

While at first glance this may seem like good news, HR 436 IH also introduces new valuation rules which will affect minority interest valuation adjustments on the transfer of “any interest in an entity other than an interest which is actively traded” and “no discount shall be allowed by reason of the fact that the transferee does not have control of such entity if the transferee and members of the family of the transferee have control of such entity.” In other words, the value of “nonbusiness assets” are removed from the value of the entity when considering valuation adjustments, and these “nonbusiness assets” will be treated and valued as direct gifts.

Additionally, the Act takes away both the marketability and minority interest valuation adjustments which are currently hovering between 15% to 25% for most Family Limited Partnerships, Corporations, and other entities holding passive assets beyond reasonable working capital needs.(2)

There is a proposed exception for entities holding real estate in which the transferor materially participates. Commentators believe this to mean that when the transferor materially participates in the business, the business will still qualify for a marketability valuation adjustment including any “reasonably required working capital for the trade or business.” Notwithstanding, the Act may be the death knell of the minority interest adjustment for family owned businesses.(3)

In traditional legislative fashion, whenever the government gives us clear guidelines (e.g., a $3.5 million per person Exemption and a top estate-tax rate of 45%), they also add an unknown which clouds the issue. Valuation discounts have been very attractive planning tools for many years due to the reduction in asset value that can be useful for estate and gift planning. Valuation adjustments between 15% to 25% are so common, they are perceived as almost automatic. Now it seems a new source of estate tax litigation is going to be over what is “reasonably required working capital needs of a trade or business.”

Furthermore, an overlooked victim of HR 436 IH will be the country’s charitable organizations. People make gifts or bequests to charitable organizations for any number of reasons. Regardless of the motivation behind the charitable gift, charity is a great way to lend a helping hand to those in need. U.S. tax law is designed to encourage these gifts, and when those in need give back – it’s a win-win. As an estate planner, when working with clients, the conversation eventually turns to death and taxes. Just as there are many ways to plan for the orderly disposition of one’s property, there are also many planning tools available to deal with estate taxes. When speaking with my clients about estate taxes, whenever they are given a choice of paying estate taxes or donating an equivalent amount to a charity of their choice, the charity option always wins. With 98% of American household’s no longer being subject to estate taxes, many charities and foundations are worried they will see a significant, long-term decline in large gifts from wealthy donors. Like it or not, the estate tax is vital in encouraging the Nation’s rich to give money to charity.

As with most things, there is more than one way to view the Certain Estate Tax Relief Act of 2009. Regardless of the value of your estate, careful planning should be undertaken. Whether your desire is to help your family, to help others in need, or to prevent the government from redistributing your wealth, estate planning is required to maximize your objectives.ß


  • (1) $7 million for couples·  (2) This would apply to transfers after the enactment.·  (3) LISI Estate Planning Newsletter #1401 (January 16, 2009).