Estate tax reform expected later this year.

• Author: North, Cady
• Position: American Recovery and Reinvestment Act of 2009 - United States. Congress. House

Once Congress finalizes its major health care overhaul bill, it's likely to turn to other matters, including expiring tax provisions.

The annual "patch" for the alternative minimum tax was already passed for this year as a provision in the economic stimulus bill, the American Recovery and Reinvestment Act of 2009. There are several other expiring tax provisions, which are normally taken up in "tax extenders" legislation on an annual basis, such as the research and development tax credit and the state and local sales tax deduction.

This year is different, however, because the estate tax will also be expiring. Under current law, the estate tax will be repealed in 2010 for one year, and then in 2011 will be reinstituted at a top rate of 55 percent, with a $1 million exemption (essentially reverting back to 2001 rates).

The tax extenders bill may be delayed until after January due to full legislative calendars. But Democratic leadership has made it a priority to pass an estate tax reform bill this year--possibly in a standalone measure--to prevent full expiration of the tax in 2010. They will likely attempt to extend the estate tax at 2009 levels (45 percent top rate with a $3.5 million exemption), which would raise more than $20 billion in revenue per year. Yet, there are many in Congress who would like to see a "more reasonable rate and exemption amount."

Millions of small and family-owned businesses are impacted by the estate tax each year, and high estate-tax rates are burdensome to successful businesses. FEI's Committee on Private Company Policy (CPC-P) is closely following the issue as it impacts many FEI member firms.

The committee believes any reform efforts should include repeal of the tax, or, at a minimum, significant reduction. Most small and family-owned firms are already subject to federal income taxes, state and local taxes, as well as capital gains taxes. Additionally, at the time of death, an estate is subject to high tax rates.

The view is that since death does not create liquidity, it should not be considered a taxable event. The estate tax takes a toll on many businesses' finances, sometimes resulting in forced liquidation of family businesses to pay the bill.

The committee wants an estate tax that is predicable year after year, limits the need for costly estate planning and--most importantly--protects businesses from having to sell assets to pay the tax.

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