This year Congress will likely enact new estate and gift tax legislation. At this time, we do not know what the legislation will ultimately provide. However, reviewing bills that have already been introduced in Congress may provide us with some idea of what the terms of the new legislation will be. H.R. 436 was recently introduced in the House of Representatives. Its consequences, if enacted in its current form, would be far reaching.

H.R. 436 would make several changes to the existing federal estate and gift laws. First, it would maintain the estate tax exemption amount at its current level of $3.5 million. Thus, estates of $3.5 million or less would not be subject to the estate tax. The bill would also repeal the new carryover basis rules that are scheduled to take effect in 2010, thereby maintaining the current date of death basis rules. Thus, a beneficiary’s basis in the assets it receives from an estate would continue to be equal to their value at the date of the decedent’s death. H.R. 436 would also fix the maximum estate tax rate at 45 percent, with a phase-out of graduated tax rates for estates in excess of $10 million. The Bill would also keep the federal lifetime gift tax exemption at $1 million. These provisions would be effective for decedents dying and gifts made after December 31, 2009.

The Bill would also make significant changes to the valuation of non-business assets held by entities for estate and gift tax purposes. If an interest in an entity, such as a limited liability company, partnership or corporation, is transferred, the value of any nonbusiness asset held by that entity would generally be treated as if the asset itself were being transferred. Thus, there would be no valuation discounts allowed as a result of the entity holding this type of asset. Nonbusiness assets would include such things as cash, stock, notes and real property used in a real property business, including, for example, the real estate development, construction or rental business. An exception would be provided for real property used in an active business where the transferor meets certain material participation requirements. An exception would also be provided for working capital. At this time, it appears the effective date for this provision of the Bill will be for transfers made after the date of its enactment.

In addition, the Bill would limit the availability of a minority discount under the estate and gift tax rules for the transfer of an interest in any entity that is not actively traded. A minority valuation discount would no longer be available where such an interest is transferred and the transferee and members of his family have control over the entity. This would effectively deny a minority discount for transfers of interest in most family owned entities. The proposed effective date for this provision would also be for transfers made after the date of enactment.

As noted above, we do not know whether H.R. 436 or legislation similar to it will ultimately be passed by Congress. However, if you are currently planning to make transfers of interests in entities to which it would apply, you may wish to consider making such transfers now, before the enactment of any new legislation.

Circular 230 Disclosure

To ensure compliance with requirements imposed by the IRS, unless specifically indicated otherwise, any tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of avoiding tax related penalties or promoting, marketing or recommending to another party any tax related matter addressed herein.