HR – 436 – “Certain Estate Tax Relief Act of 2009”

By now, I think we’ve all heard of the proposed legislation HR 436. I suppose that some sort of tax relief is contemplated. The question is “tax relief for whom?” The answer remains to be seen, but one thing is sure, the time to make transfers is now!

The proposed legislation locks in the Estate Tax exclusion amount at $3,500,000. This certainly seems like a tax cut for the wealthy, as it makes certain the exemption amount is at its highest level ever. This provision eliminates the possibility that the estate tax will disappear completely in 2010 and then return in 2011 with a much lower exemption amount. The Bill also freezes the maximum rate at 45%. There we have it, tax relief. A $3.5MM exemption is much better for taxpayers than the exemption that is currently effective. Reading a little further into the Bill, however, reveals some interesting modifications to that “relief”.

First, if an estate value exceeds $10MM, the 45% “maximum” rate increases by 5%. The 5% increase will be applied up to a specified limit. The additional tax shall not exceed the credit amount discussed above. That is, any amount greater than $10MM will be taxed at a rate of 50% until the tax that would have been collected on the entire $3.5MM excluded value is completely recovered. Therefore, any estate exceeding the value beyond which the excluded tax amount has been recovered will pay tax at a rate of 45% on the entire value.

The next modification that affects the tax is a limitation on the application of “minority discounts”. The Bill would disallow the application of discounts related to the ownership of minority, or non-controlling, interests when considering non-business assets held by an entity. This appears to apply to assets deemed to be non-business assets held by operating companies as well as all assets held by non-operating, or holding-type entities (including Family Limited Partnerships and the like). This provision does not mention anything about the application of discounts for lack of marketability (DLOM) associated with ownership of such an interest.

The lack of mention of discounts for lack of marketability seems, at first, to leave room for continued planning. The last page of the bill may close the door to that room, however. In a section entitled “Limitation on Minority Discounts”, the Bill states that “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”. Although this section discusses only “minority” discounts, it effectively eliminates meaningful DLOMs as well, because there is no valuation research available that supports the application of significant discounts for lack of marketability when analyzing anything other than non-controlling interests. By effectively negating Revenue Ruling 93-12, and returning family ownership aggregation rules, the Bill will eliminate all discounts for intra-family transfers.

So, there is some solace in the fact that under the regime that would be implemented by HR 436, those with estates valued up to $3.5MM would no longer pay tax. In addition, those with estates valued less than the amount at which the excluded tax is recovered by the 5% premium would pay an effective rate of something less than 45%. Intra-family planning that takes advantage of the economic reality of the applicability of discounts, however, would end. Personally, I’m not so “certain” that this bill represents “estate tax relief”, but I hope its introduction will encourage taxpayers to complete their intra-family planning now, while they still can.

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Robert Buchanan

Valuation | ESOP
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