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1111 SUPERIOR AVENUE
CLEVELAND, OHIO 44114
216.696.4200
Since the 1860's, Schneider, Smeltz, Ranney & LaFond has offered thoughtful, practical solutions to the complex legal issues facing our clients. |
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Please visit us at www.ssrl.com. Did you know that Schneider, Smeltz, Ranney & LaFond is one of Cleveland's oldest law firms? The new website showcases the History of the firm and its founders dating back to the 1860's.
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 Roth IRA Conversions and 2010: Choices are Coming - To Convert or Not to Convert |
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Introduction
As 2010 grows nearer, you may hear more buzz in the financial world about the idea of converting traditional IRA accounts to a Roth IRA in 2010. The decision -- to convert or not to convert -- has long been available to some investors. The IRS has always restricted who was eligible for both conversions and new contributions to Roth IRAs. However, absent an unexpected change in federal tax law, restrictions on Roth IRA conversions are lifted starting in 2010 -- meaning conversion will be available to everyone.
The Old Law (Before January 1, 2010)
Ever since the Roth IRA was introduced in 1998 the law has placed income limitations to control both: (1) who is eligible to contribute to Roth IRA accounts; and (2) who is eligible to convert traditional IRA accounts to Roth IRA accounts.
Only tax filers who make less than $100,000 are eligible to convert traditional IRA accounts to Roth IRA accounts. The income limit applies to both single and married individuals. Any married persons who wish to carry out such a conversion must file jointly and must report total income of less than $100,000 on their joint return. Those who choose to file tax returns as "single" (married filing separately) filers are forbidden altogether from carrying out a conversion. This income limitation has not changed since the Roth IRA was introduced.
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| Workplace Wellness Programs: What's Legal, What's Not (and Why Your Company Should Have One) |
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Background
Researchers estimate that 75 percent of all healthcare costs stem from preventable chronic health conditions such as diabetes, hypertension, and obesity.[1] Many chronic diseases and acute conditions, such as seasonal flu, can be effectively prevented through lifestyle changes, immunizations, preventive medications, or screenings. Despite this, only half of insured adults receive preventive interventions.[2] That translates to only one percent of the $1.9 Trillion spent on healthcare in the United States being used to prevent illness and injury.
With this knowledge many employers are taking a proactive approach to prevention and management of employee wellness by investing in workplace wellness programs as a cost savings tactic. With health insurance premiums as one of employers' major costs, effective workplace wellness programs have been shown to produce savings not only in health insurance premiums but in employee productivity. Effective workplace wellness programs result in a healthier workforce and employer's report that healthier employees show up to work more often, are more productive, and visit the doctor less frequently. Additional costs savings may be ahead for employers who sponsor workplace wellness programs in the form of federal tax credits.
(continued below)
_____________________________ [1] Center for Medicare & Medicaid Services. National Health Expenditures and Selected Economic Indicators, Levels and Average Annual Percent Changes: Selected Calendar Years 1990-2013. Office of the Actuary, 2004.
[2] Institute of Medicine. The future of the Public's Health in the 21st Century, Washington, DC, National Academy Press; 2002. | |
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Attorney Spotlight
Sandra C. Lucas
This month's featured attorney is a member of our Estate Planning and Probate practice group. A lifelong Clevelander, Sandy Lucas received her undergraduate degree from John Carroll University, where she majored in English and history.
Sandy's career with the firm began in the summer of 1999, when she worked as a summer associate while attending the Case Western Reserve University School of Law. Following her law school graduation, Sandy joined the firm as an associate. She became a partner in January 2007.
Sandy focuses her practice on estate planning, including planning designed to protect assets for multiple generations of families; charitable giving; and planning intended to minimize the impact of wealth transfer taxes. In addition, Sandy advises clients who are beneficiaries or fiduciaries in all aspects of estate and trust administrations. She has presented educational seminars to members of the Cleveland (Metropolitan) Bar Association and has spoken at our firm's Charitable Giving Seminar for clients and friends of the firm.
Outside of work, Sandy serves on the boards of Catholic Charities and the Padua Franciscan High School Endowment Trust. She previously served as chairperson of the Associate Board of the Catholic Diocese of Cleveland Foundation. Sandy also volunteers with other organizations in the community.
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New Asset Protection Blog!
Recently one of our partners, Kenneth J. Laino, announced the launch of his new asset protection blog. The blog is designed to help individuals and businesses take advantage of asset protection laws. To access the new blog, please visit www.assetprotectionlawjounal.com or just search for "asset protection law journal". | | |
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| Tax Court Rules Against IRS and Increases Deductibility of Business Losses |
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On June 30th, the U.S. Tax Court ruled against the IRS and in favor of various small business owners by expanding the deductibility of business losses from businesses organized as limited liability companies ("LLCs") and limited liability partnerships ("LLPs"). The ruling particularly benefits people who are active owners of LLCs or LLPs but also have income from other sources.
The taxpayers in this case were Nebraska farmers who owned partial interests in various LLCs and LLPs and were active in operating the various companies. The companies generated losses, and the taxpayers deducted those losses each year. The IRS argued the losses could only be deducted against the future income of the businesses, not against the taxpayers' ordinary income in the year the losses occurred.
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The Future of the Federal Estate Tax |
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Congress is mulling the future of the federal estate tax, which some commentators predict could eat away $80 million or more of Michael Jackson's estate. Had Jackson died only a few months from now, in 2010, his estate would not owe any federal estate tax--- at least under current law!
Why such dramatically different results in such a short span of time?
The Effects of EGTRRA: 2001-2009
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) made significant changes to the federal system of wealth transfer taxes, which have taken effect over the past several years and which are set to culminate in 2010.
Since EGTRRA took effect, the top federal estate tax rate has gradually decreased from 55% in 2001 to 45% this year. The federal estate tax exemption (the amount each person can pass free of federal estate tax) has gradually increased from $1 million in 2001 to $3.5 million in 2009. The exemption amounts and rates for the generation-skipping transfer tax (tax on transfers going to grandchildren and those deemed to be two or more generations below that of the person making the transfer) presently parallel the estate tax rates and exemptions.
In contrast, under EGTRRA, the federal gift tax exemption is only $1 million. Thus, the federal gift and estate tax systems are not presently unified, and lifetime gifts over $1 million (not including annual exclusion gifts; currently, up to $13,000 per donee in 2009) will trigger federal gift taxes during the life of the donor.
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Roth IRA Conversions and 2010: Choices are Coming - To Convert or Not to Convert (continued) |
In 2009, only individual income tax filers who make less than $120,000 and married joint filers who make less than $176,000 are eligible to make contributions to Roth IRA accounts. Persons who make more than those amounts, or who are retired and have no earned income, are ineligible to make contributions to Roth IRA accounts.
As a practical matter, the income limitations summarized above sharply limit the application of Roth IRAs for many high income/high net worth persons. The very persons to whom the income tax characteristics of the Roth IRA are most attractive are foreclosed from taking advantage of the Roth IRA's virtues by income limitations.
Beginning in 2006, Congress did open the door to the "Roth world" for some high income filers through the introduction of Roth 401(k) options. However, the Roth 401(k) has been slow to catch on with employer-sponsored retirement plans for a variety of reasons, and it has a few critical differences from a Roth IRA account.
The New Law (Beginning January 1, 2010)
Through enactment of the Tax Increase Prevention and Reconciliation Act (TIPRA) of 2006, the income limit on conversions to Roth IRAs is scheduled to disappear in 2010. Income limitations for contributions to Roth IRA accounts will continue to stay in place.
This change means that any taxpayer who has a traditional IRA account will be eligible, regardless of income, to convert the IRA account to a Roth IRA account.
The decision of whether to convert or not to convert is not an all-or-nothing proposition-the account owner can choose to convert an entire account or a portion of an account in any given year. In some cases, the owner may choose to convert over multiple years.
The Kicker -- for Conversions in 2010
But there is more. Generally, any income associated with a Roth conversion is reported in the year of conversion, and any associated income tax would be paid for that year.
However, TIPRA provided that, if a taxpayer completes a conversion in 2010, he or she will not report the income associated with the conversion until later -- 1/2 in 2011 and 1/2 in 2012. If desired, the taxpayer can opt out of this tax deferral opportunity and instead report all of the associated income in 2010.
In other words, Congress gives taxpayers a break by both allowing them to defer income tax for up to two years beyond the "normal" rules, and to spread income associated with a conversion across two tax years instead of the normal one year -- presumably lowering the overall income tax rate applicable to the conversion.
Traditional IRAs Compared to Roth IRAs
To put all of this in context, let's do a quick review of Traditional IRAs versus Roth IRAs.
Traditional IRAs (and 401(k) plans):
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Are (generally) funded with pre-tax dollars (the owner has not paid tax on the income used to fund the account);
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Offer tax-deferred growth and income, while the money remains in the IRA account;
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Require distributions during lifetime, starting when the owner turns roughly 70 and 1/2 years old; and
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Are subject to regular income taxes when money is withdrawn from the IRA, generally at 100 cents on the dollar (each $1.00 withdrawn is $1.00 of regular income.
Roth IRAs:
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Are funded with after-tax dollars (the owner has already paid tax on the income used to fund the account-there is no upfront tax break);
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Offer tax-free growth and income, while the money remains in the Roth IRA account;
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Require no mandated distributions during an owner's lifetime, though distributions can generally be made to the owner tax-free, as needed; and
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Are generally not subject to income taxes when money is withdrawn from the Roth IRA account, whether withdrawals are made by the owner during the owner's lifetime or by beneficiaries after the owner's death.
At the risk of stating the obvious, the tax-free nature of Roth IRAs (compared with the tax-deferral of IRAs) is the most attractive attribute for most taxpayers.
The Magic (and the Pain) of Conversion to a Roth IRA
As is true in most of life, there is a tradeoff in deciding whether to convert to a Roth IRA. That is, there is a price to pay to qualify for the tax advantages of a Roth IRA. The price of a Roth IRA conversion is that the owner must pay ordinary income tax on the entire amount converted from a traditional IRA to a Roth IRA account.
The magic is that, once the IRA account is converted, withdrawals from the Roth IRA account are generally income tax free, whether or not those withdrawals comprise the "original" balance converted or growth or income on the original balance.
In substance, Congress is offering a choice (starting in 2010) for every taxpayer who owns an IRA account. Each taxpayer can choose: (1) not to convert to a Roth IRA, save income taxes currently, and pay income taxes when withdrawals are made from the account; or (2) convert to a Roth IRA, pay income taxes currently, and pay no additional income taxes when withdrawals are made from the account.
The magic is in the tax-free nature of the Roth IRA account. The pain is in the taxes due around the time the conversion is completed. One silver lining: if your IRA account has, like most, suffered in the market downturn, a conversion may be less expensive than in past years because by converting now you may pay lower taxes than you would when the investment market is in a better condition. Of course, this idea assumes that the market is comparatively low currently and is likely to rise in the future-an assumption we will let you ponder!
The Who and Why -- Who Should Consider Conversion and Why?
Generally, the longer an owner has to take advantage of the tax-free growth offered by a Roth IRA, the more attractive the opportunity to convert to a Roth IRA will be. A good generic rule of thumb is that a Roth IRA conversion should only be considered if the owner is planning to defer distributions for at least ten years and if the taxes paid as a result of conversion will be paid from a source outside of the converted account. However, this is not a simple answer because so many factors and future events are in play, including:
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The owner's current marginal income tax rate (with and without conversion);
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The owner's expected marginal income tax rate(s) in the years of withdrawal;
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The expected inflation rate;
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The owner's expected overall rate of net investment return, both inside and outside the account;
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The number of years expected between conversion and withdrawal(s); and
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Whether the owner has sufficient assets, liquidity, and disposition to pay the income taxes resulting from a conversion -- preferably from sources other than the IRA account.
Obviously, some of these factors are difficult if not impossible to adequately forecast. Having said that, here are some good general rules of thumb:
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Rising tax rates make conversion more attractive, lower tax rates make conversion less attractive;
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Higher rates of investment return make conversion more attractive, lower rates of return make conversion less attractive;
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The longer the timeframe between conversion and withdrawals, the more attractive is conversion; and
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The owner's ability and willingness to pay conversion-related taxes from a source outside of the IRA account makes conversion substantially more attractive.
Like many financial and legal issues, each family's situation is unique, and the best way to analyze the situation is to work with the family's legal, tax, and investment professionals to gather facts, make some educated assumptions, and then "run the numbers."
Helping Yourself vs. Helping Your Children
Another question to consider is whether the owner is making his or her decision based on potential benefit to himself or herself, or based on the potential benefit to his or her children (or others, such as spouses or grandchildren).
Consider the following example. Dr. Jones is 85 years old and married to Mrs. Jones, who is age 75. Dr. and Mrs. Jones are retired and have several children and many grandchildren. Dr. Jones has a traditional IRA account worth $2,000,000, from which he has been taking required minimum distributions. Before now, Dr. and Mrs. Jones were never able to consider a Roth IRA conversion because their income was always over $100,000. Dr. and Mrs. Jones wish to benefit their children and grandchildren at their respective deaths.
If Dr. Jones makes the Roth IRA conversion decision based on his own personal benefit, he will almost certainly decide not to complete a conversion, because the tax price of doing so will be too high to justify the tax advantages he might enjoy during the remainder of his lifetime.
However, if Dr. Jones does not expect to need the IRA account for support during his lifetime (he has other sources of income), and if he makes his decision based on the potential benefit to Mrs. Jones, the children, and/or the grandchildren, the decision "tilts" towards conversion-the younger the potential beneficiaries, the longer the potential deferral period-the more advantageous a conversion will be.
The general idea behind conversion is that the owner of the account is pre-paying income tax obligations-paying the IRS now to avoid paying the IRS more later. Put another way, a conversion serves to change the character of the account from tax-deferred to tax-free. If the owner is willing and able to help future generations beyond himself when making this decision, conversion to a Roth IRA is significantly more attractive because the eventual beneficiaries of the account will make income tax-free withdrawals after the owner's death. Consider also that tax paid at conversion reduces the size of the owner's overall estate. Payment of the tax at conversion may save substantial estate tax at the owner's death and will not be considered a taxable gift. The combination of potential estate tax and future income tax savings may make conversion very attractive for owners who are willing to view this decision in an estate planning context rather than only considering the impact of a conversion on themselves personally.
Conclusion
Is a conversion from a regular IRA to a Roth IRA right for you? We encourage you to contact us if you want to discuss this issue further. |
Workplace Wellness Programs: What's Legal, What's Not (and Why Your Company Should Have One) (continued) |
Incentives for Employers in the Healthcare Overhaul Legislation
As Congress tackles the healthcare overhaul, incentives for employers to implement workplace wellness programs are likely to be included. Following one of President Obama's eight principles of health legislation is that it must "invest in prevention and wellness", Congress's plan to invest in workplace wellness programs is included in recent policy options presented by the Senate Finance Committee.
What Does a Workplace Wellness Program Look Like?
A wide range of wellness programs exist to promote health and prevent disease. Not all are even labeled wellness programs. Examples include a program that reduces individual's cost sharing for complying with a preventive care plan; a diagnostic testing program for health problems; rewards for attending educational classes; following healthy lifestyle recommendations, or meeting certain biometric targets such as weight, cholesterol, nicotine use, or blood pressure targets.
A well known example of an aggressive workplace wellness program for a large company is Scott's Miracle-Gro Company. Scotts created its wellness program in 2005. Components of the wellness program include a medical and fitness center across the street from its headquarters in Marysville, Ohio, which employees may use even during work hours, and that is staffed by two full time doctors, five nurses, a dietician, counselor, two physical therapists, and a team of fitness coaches, with a drive thru pharmacy for free prescription drugs. Throughout the company, employees who agree to take a health care self-assessment earn a $40 per month reduction in their share of insurance premiums. In addition to the health care assessment, an outside management company was retained to review physical, mental, and family health histories of nearly every employee and cross-reference that information with insurance claims data. Health coaches identify employees at moderate to high risk, draw up management program, and employees who do not follow the recommendations and work with the health coach are required to pay an additional $67 a month in insurance premiums. Additionally, the company has a tobacco-free policy that prohibits employees from using tobacco products at any time, on or off duty (in states that do not protect an employee's right to smoke). Tobacco use testing is required of all new hires and is done randomly on the existing workforce; the presence of nicotine is grounds for termination of employment. While Scotts Miracle-Gro is a large company with an extensive wellness program, most employers' programs are not as aggressive. Many employers have voluntary wellness programs. These can range from employers offering discounted gym memberships, providing conference space for weight watchers, offering healthy choices in vending machines, offering flu shots, sponsoring health fairs, and generally try to create cultural and environmental changes that support long term behavioral change.
The Legal Implications
When a wellness program is structured so that employee participation is entirely voluntary, there are few legal issues. However, when an employer desires to implement a program that provides incentives for participation or a more proactive program, legal issues arise as the level of incentives for participation increase.
A. The Health Insurance Portability and Accountability Act (HIPAA)
The first step is to consider whether a wellness program is subject to the Health Insurance Portability and Accountability Act (HIPAA) requirements or not. To determine this, the employer can ask the following questions about its wellness program:
(1) Is the wellness program part of a group health plan?
A wellness program is only subject to HIPAA if it is part of a group health plan. If the employer operates the wellness program as an employment policy separate from the group health plan, the program may be covered by other laws, but it is not subject to HIPAA. Example: An employer institutes a policy that any employee who smokes will be fired. Here the health plan is not acting, so the HIPAA rules do no apply. However other law may apply. (2) Does the wellness program discriminate based on a health factor?
A wellness program discriminates based on a health factor if it requires an individual to meet a standard related to a health factor in order to obtain a reward or to avoid a penalty. A reward can be in the form of a discount or rebate or a premium or contribution, a waiver of all or a part of a cost-sharing mechanism (such as deductibles, copayments, or coinsurance), the absence of a surcharge, or the value of a benefit that would otherwise not be provided under the healthcare plan. Example 1: Employees who have a cholesterol level under 200 will receive a premium reduction of 20%. In this example the plan requires employees to meet a standard related to a health factor in order to obtain a reward and is subject to HIPAA. Example 2: The program provides premium discounts to employees who don't smoke, who are not obese or hypertensive, or who have low cholesterol. In this example, the health plan related rewards are tied to having or attaining favorable health risk factors and is subject to HIPAA. Example 3: A plan requires all eligible employees to complete a health risk assessment to enroll in the plan. Employee answers are fed into a computer that identifies risk factors and sends educational material to the employee's home address. In this example, the requirement to complete the assessment does not, itself, discriminate based on a health factor and thus is not subject to HIPAA. However, if the plan used individuals' specific health information to discriminate in individual eligibility, benefits, or premiums, there would be discrimination based on a health factor. If the employer answered "No" to either of the above questions, the wellness program does not need to comply with HIPAA. If the employer answered "Yes" to either question the wellness program must comply with HIPAA. To comply with HIPAA the wellness program must meet the following five requirements: (1) The size of the reward offered may not exceed 20% of the total cost of health care coverage for an employee or employee's family.
(2) The wellness program must be reasonably designed to promote good health or prevent disease. (It may not be a subterfuge for discriminating based on a health factor.)
(3) Individuals who are eligible for the program must have the opportunity to qualify for the reward under the program at least once a year. (This does not mean that the employer must continue the program for more than one year, but if it does it must, for example, allow employees who went through the smoking cessation program last year to go through it again this year.)
(4) The reward must be available to all similarly situated individuals. (A component of meeting this requirement is that the program must have a reasonable alternative standard (or waiver of the otherwise applicable standard) for obtaining the reward for any individual for whom, for that period: (i) it is unreasonably difficult due to a medical condition to satisfy the otherwise applicable standard; or (ii) it is medically inadvisable to attempt to satisfy the otherwise applicable standard. It is permissible for the employer to seek verification that a health factor makes it unreasonably difficult or medically inadvisable for the individual to satisfy the otherwise applicable standard.
(5) The wellness program materials must disclose the availability of an alternative standard for those who need it. The regulations suggest the following: "If it is unreasonably difficult due to a medical condition for you to achieve the standards for the reward under this program, or if it is medically inadvisable for you to attempt to achieve the standards for the reward under this program, call us at [insert phone number] and we will work with you to develop another way to qualify for the reward."
While the main legal issue with wellness programs is HIPAA compliance, a host of other laws can be implicated. Below is a brief overview of the others. B. Disability Discrimination under the American with Disabilities Act Under the Americans with Disabilities Act (ADA), an employer may not discriminate against an individual with a disability with regard to, among other things, employee compensation and benefits available by virtue of employment. ADA issues could arise in wellness programs in various ways. For example, an employer is implementing a non HIPAA wellness program that includes a "Walk Five Miles a Week" program which rewards employees who walk five miles a week with a $50 gift certificate. An employee with a disability limiting his or her ability to walk at all, nonetheless five miles a week will not be able to participate and therefore cannot earn the additional compensation. This can be remedied by ensuring that the wellness program provides alternatives for disabled employees to earn the additional compensation or award. For example, the employer could offer the disabled employee the opportunity to teach a class on the benefits of exercise in order to obtain the reward, or even give the reward outright to avoid potential discrimination. The ADA was amended in 2008 making the threshold for establishing a disability much lower than prior to the amendment, making it possible for almost every employee to be "disabled" in some way. To ensure that plan does not discriminate against those with disabilities, it should be designed to be as inclusive as possible. C. Age Discrimination in Employment Act (ADEA) The Age Discrimination in Employment Act (ADEA) prohibits employers from discriminating on the basis of age. Wellness programs should be designed so that older workers can meet the criteria to earn the rewards. For example, if the wellness program has a mandatory program requiring employees to meet a certain health standard, that standard should take into account and/or be adjusted for the age of the employee. D. National Labor Relations Act (NLRA) If the employer has unionized employees the National Labor Relations Act (NLRA) provides that employers must bargain in good faith over mandatory subjects of bargaining including wages and other terms and conditions of employment. Because many wellness programs are likely to impact employees' wages via reduced health insurance premiums employers will likely be required to propose wellness programs to the union and engage in bargaining over the terms of the program. |
| Tax Court Rules Against IRS and Increases Deductibility of Business Losses (continued) |
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Passive business losses are only deductible against the business's future income. In most cases, courts will analyze the taxpayer's involvement in the business to determine if the business losses are passive or active. Under the Internal Revenue Code, losses from "limited partnership interests" are passive by definition. The IRS unsuccessfully argued that interests in LLCs and LLPs should also fall under this definition. The Court ruled instead that the losses from LLCs and LLPs are passive only if the owner does not materially participate in the business.
How much do you need to participate in an LLC or LLP to be able to enjoy this deduction? Material participation generally means that, during the tax year, you did one of the following:
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Spent at least 500 hours on the business;
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Spent at least 100 hours on the business, which was more time than any other participant;
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Spent at least 100 hours on the business and at least 100 hours on other businesses, such that the total time spent on your "100-hour" businesses is more than 500 hours;
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Were the only participant in the business; or
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Materially participated in the business in 5 of the last 10 years.
Suppose a husband has a high salary job as an engineer and his wife is a partial owner and part-time worker at a gift shop organized as an LLC with business losses this year. Under this new ruling, the losses from the wife's gift shop can be used as a deduction against husband's salary, investment income, or many other types of income.
If you or your spouse is an owner and active participant in an LLC or LLP with losses this year, please contact us to see if you can take advantage of this ruling to reduce your personal tax bill in 2009.
The case is Garnett v. Commissioner 132 T.C. No. 19. The opinion can be found at http://www.ustaxcourt.gov/InOpHistoric/garnett.TC.WPD.pdf
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The Future of the Federal Estate Tax (continued) |
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EGTRRA Changes For 2010: Estate Tax Repeal
While EGTRRA has phased in certain changes over the past several years, we are presently on course for even more dramatic changes in 2010, which include the following:
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Next year, the federal estate tax and generation-skipping transfer tax are repealed altogether, but only for one year.
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For 2010 only, EGTRRA also eliminates the automatic "stepped-up basis" for inherited assets. Stepped-up basis allows an heir to use the value of an inherited asset as of the decedent's date of death as the heir's cost basis for the asset. For persons dying in 2010, estate executors can instead elect "carry-over" basis by increasing the basis of certain estate assets up to $1.3 million, in addition to a maximum of $3 million for assets left to a spouse.
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The federal "lifetime" gift tax exemption remains at $1 million.
What's On the Horizon For 2011 And Beyond?
After one year of federal estate tax repeal and "carry-over" basis, the provisions of EGTRRA are set to expire on December 31, 2010, at which time the pre-EGTRRA system of wealth transfer taxes will be restored, beginning in 2011. This means the 2011 federal estate tax and generation-skipping transfer tax exemptions will revert to $1,060,000 (the 2001 federal estate tax exemption amount, as indexed for inflation) and the top estate tax rate will return to 55%. Automatic stepped-up basis will also return in 2011. All of these "pre-EGTRRA" provisions will come back into effect unless Congress takes action to change the law.
Given the current economic climate, many have expected Congress to act before 2010 to eliminate the impending estate tax repeal and provide certainty regarding the estate tax in coming years. However, it is still unclear what approach Congress will choose and when (and if) it will take action before 2010.
A number of proposals are making their way through the legislative process. The following are key provisions of notable proposals that have been introduced in Congress:
McDermott Bill (H.R. 2023):
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Would set the estate tax exemption at $2 million (indexed for inflation)
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Proposed estate tax rates: 45% for estates up to $5 million; 50% for estates between $5 million and $10 million; and 55% for estates over $10 million
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Would unify the estate and gift tax exemption amounts (both exemption amounts would be set at $2 million)
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Would allow a surviving spouse to use the unused portion of a deceased spouse's estate tax exemption
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Would retain current step-up in basis rule
Pomeroy Bill (H.R. 436):
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Would freeze the estate tax exemption at $3.5 million (not indexed for inflation) with a 45% top estate tax rate
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Would not unify the estate and gift tax exemption amounts (gift tax exemption would remain at $1 million)
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Would not allow a surviving spouse to use the unused portion of a deceased spouse's estate tax exemption
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Would retain current step-up in basis rule
Baucus Bill (S. 722):
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Would freeze the estate tax exemption at $3.5 million (indexed for inflation) with a 45% top estate tax rate
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Would unify the estate and gift tax exemption amounts
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Would allow a surviving spouse to use the unused portion of a deceased spouse's estate tax exemption
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Would retain current step-up in basis rule
Mitchell-Kirk-Nye Bill (H.R. 498):
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Would phase in a $5 million estate tax exemption by 2015 (indexed for inflation) and reduce estate tax rate to 15% (the capital gains tax rate) for estates under $25 million and 30% for estates over $25 million
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Would unify the estate and gift tax exemption amounts
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Would allow a surviving spouse to use the unused portion of a deceased spouse's estate tax exemption
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Would retain current step-up in basis rule
Obama Administration:
In addition, the Obama administration has supported the following estate and gift tax reforms as part of its budget proposal for 2010:
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Would freeze the estate tax exemption at $3.5 million (indexed for inflation) with a 45% top estate tax rate
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Would not unify the estate and gift tax exemption amounts (gift tax exemption would remain at $1 million)
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Would not allow a surviving spouse to use the unused portion of a deceased spouse's estate tax exemption
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Would retain current step-up in basis rule
Conclusion
The next few months should prove interesting, as Congress tackles not only health care reform, but also potential changes to the federal wealth transfer tax system before the scheduled federal estate tax repeal in 2010. |
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At Schneider, Smeltz, Ranney & LaFond, we offer thoughtful, practical solutions to the complex problems facing our clients. Established in 1895, Schneider, Smeltz, Ranney & LaFond is Cleveland's oldest law firm. We not only apply the technical expertise our clients require, but also provide excellent, personal, and timely service to our clients.
We are a civil practice firm. Our primary areas of practice are business law, business succession planning, estate planning, estate and trust administration, charitable planning, family law, employment law, litigation, real estate, taxation and health care law.
Please feel free to contact one of our attorneys if you would like more information on any of the above issues or if you are in need of quality, legal services.
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