JCT Issues New Report to Simplify Estate Tax Reform

April 8, 2008

On April 3, the Senate Finance Committee held their third in a series of hearings to discuss a range of issues related to the estate tax. In addition to the hearing, the estate tax is the subject of a recent report from the Joint Committee on Taxation (JCT), entitled Taxation of Wealth Transfers Within a Family: A Discussion of Selected Areas for Possible Reform, which reviews ideas on how to simplify estate tax planning.

At the April 3 hearing, lawmakers heard testimony addressing liquidity problems of small and family-owned businesses. Chairman Max Baucus (D-Mont.) and witnesses said complexity is a major problem as a one-year repeal of the tax approaches in 2010, followed by its restoration to pre-2001 levels in 2011. The witnesses urged the committee to consider making the exemption portable, unifying the estate and gift tax, and improving the installment payment program as possible ways to ease the estate tax burden.

Through the series of hearings held, the Finance Committee has thoroughly discussed the effects, alternatives and potential amendments to the estate tax, but is still not any closer to reform. Chairman Baucus has stressed his commitment to working toward a bipartisan estate tax compromise, but has not provided any specifics yet.

Meanwhile, Ranking Member Charles Grassley (R-Iowa) has acknowledged a full repeal is unlikely and pledged his support for a fiscally appropriate compromise involving the one-year repeal followed by lower rates and higher exemptions. Most likely, the committee will not have a mark-up of any legislation this year and instead will wait to see what happens in the elections this fall.

Adding to the list of groups urging reform of the estate tax, the first part of the JCT report discusses the partially unified credit against estate and gift tax, and evaluates two possible reforms to that credit. One would make the credit fully unified, and the other--referred to as portability--would allow a surviving spouse to benefit from the unused exemption amounts of the first spouse to die. It has been argued that making the estate and gift tax exemption portable would greatly simplify planning and effectively double the exemption.

The report also discusses liquidity to pay the estate tax when estates consist largely of farms or other family-owned businesses. JCT provides the following three provisions intended to mitigate the effect of the estate tax on family-operated businesses.

* Real property should be valued, for estate tax purposes, at its current-use value rather than at a higher market commercial value.

* Allow payments of estate tax attributable to certain family businesses to be deferred for five years and then made in installments over the succeeding ten years. This would allow taxpayers greater flexibility to pay their estate taxes in installment payments and give them more certainty under the program.

* Grant a deduction from the value of the gross estate for the value of certain family-owned business interests.

NSBA applauds the continued attention to the estate tax and encourages persistence in seeking out reform that will enable small and family-run businesses to escape the punitive and oftentimes devastating burden of the estate tax.