Estate tax reform expected later this year.

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 Under current law, the estate tax will be repealed in 2010 for one year, and then in 2011 will be reinstituted at a top rate of 55 percent, with a $1 million exemption (essentially reverting back to 2001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

Changing Views of the Estate Tax: Implications for Legislative Options, a February 2009 study, sponsored by the American Family Business Institute and conducted by Douglas Holtz-Eakin--a former Sen. John McCain presidential campaign adviser and recent Financial Crisis Inquiry Commission appointee--and Cameron T. Smith, found that if the estate tax is permitted to revert to 2001 levels, payrolls could fall by nearly 1 percent, removing 500,000 jobs from the economy.

Among the beneficial impacts of repealing the estate tax, the survey concluded it would:

* Increase small business capital by more than $1.6 trillion;

* Increase the probability of hiring by 8.6 percent;

* Increase payrolls by 2.6 percent;

* Expand investment by 3 percent;

* Create 1.5 million additional small business jobs; and

* Slash the current jobless rate by 9 percent.

Research shows that repeal of the estate tax or, at a minimum, significant reduction of the tax, would help ease the burden of estate taxes on closely held or family-owned businesses. Thus, FEI's CPC-P recommends:

* An exemption amount of at least $5 million for individuals and $10 million for families with the top tax rate capped at 15 percent. This will limit the number of businesses required to liquidate assets and encourage companies to continue reinvestment.

* Any unused exemption should be allowed to pass on to the surviving spouse, and full stepped-up basis, scheduled to expire in 2010, should be permanently extended.

The committee's recommendations are similar to other proposals being considered by Congress. In April, Sens. Blanche Lincoln (D-Ark.) and Jon Kyl (R-Ariz.) offered an amendment to the Senate version of the congressional budget that would have set the estate tax at a 35 percent top rate and a $5 million per spouse exemption.

This was not approved in the final budget. However, a majority of Senate Finance Committee Members and senators did go on record supporting the amendment--with a vote of 51-48--demonstrating significant support for a lower rate.

Similarly, a large group of House Members have voiced support for the Lincoln/Kyl proposal, and there are many business associations working to bring this issue to the attention of Congress. As such, there is political momentum to enact a more reasonable rate than 2009-level estate tax rates.

FEI's CPC-P will continue following this issue closely. If the issue is important to your firm, and you want to get involved, contact Cady North at: 202.626.7803

Cady North ([e-mail]) is manager of Government Affairs for Financial Executives International, based in FEI's Washington, D.C., office.