A bipartisan estate tax bill called the Estate Tax Relief Act (H.R. 3905) has been introduced in the House. Instead of there being no federal estate tax for those dying in 2010 and having the pre-2002 rules apply after 2010 (with a top rate of 55% and an exemption amount of $1 million), the new law would retain the 2009 rules, but with improvements. Between now and 2019, the exemption amount would increase to $5 million, while the top estate tax rate would decline to 35%. This means, for example, that the exemption of $3.5 million and a top estate tax rate of 45% in 2009 would change to $3.65 million in 2010 and a 44% top rate in 2010.
The bill would also repeal the modified carryover basis rules set to take effect in 2010. Under current law, heirs of estates over a certain size starting in 2010 would have to use the decedent’s tax basis for figuring gain or loss on inherited assets. The bill would retain the stepped-up basis rules that apply in 2009, allowing heirs to use the value of the asset at the time of death (in most cases) as their basis for determining gain or loss when they sell the inherited asset.
These proposed changes are expected to exempt about 99.8% of all taxpayers from any estate tax liability and would go a long way in helping small business owners and their families avoid the need to sell off business interests at fire-sale prices to pay federal estate taxes. The proposed changes would simplify estate planning for many entrepreneurs and enable them to make succession plans without tax cost.