Washington Hotline – March – Week 4 – 2011

Bipartisan Senators Propose Deficit Summit
In a letter to President Obama this week, 32 Republican and 32 Democratic Senators proposed a budget summit to implement “comprehensive deficit reduction measures.” Senators Michael Bennet (D-CO) and Mike Johanns (R-NE) were the leaders of the bipartisan group.

The letter noted that the Presidential Fiscal Commission had provided “an important foundation to achieve meaningful progress” on deficit reduction. Six senators (three Democratic and three Republican) have been working to develop an actual bill that would implement the recommendations of the Fiscal Commission.

The group of 64 senators now recommends that the President develop a comprehensive package that will attack the budget deficit. The comprehensive bill would include “discretionary spending cuts, entitlement changes and tax reform.”

In the view of the bipartisan group of senators, a joint effort “would send a powerful message to Americans that Washington can work together” on deficit reduction.

President Maya MacGuineas of the Committee for a Responsible Federal Budget praised the bipartisan effort by the 64 senators. She noted that the Fiscal Commission prompted action by the bipartisan group of six senators and now the call for reform by the larger group of 64 senators. She stated, “I’m not usually an optimist on budget issues, but something big is happening and those who don’t confront our fiscal situation head on are going to be left behind.”

Majority Leader Calls for 25% Tax Rate

In a speech on March 21, Majority Leader Eric Cantor (R-VA) proposed both a reduction in the corporate tax rates and repatriation of corporate overseas funds at favorable rates.

Leader Cantor notes that the American corporate tax rates are “50% higher than even those in Europe.” In his view, the international competition by multi-national companies has encouraged most European countries to reduce their corporate tax rates below those of the U.S. He suggests that, “We must make America competitive again by lowering the corporate tax rate to at least 25%.”

The proposed corporate tax rate would be accompanied by comprehensive tax reform. In addition, Leader Cantor notes that there is “almost $1.2 trillion in overseas profits” that American companies are not returning to America due to the tax rate. He proposes that these funds be allowed to return to America at a lower tax rate.

Treasury Assistant Secretary for Tax Policy Michael Mundaca responded to the proposal on behalf of the White House. He noted that the American Jobs Creation Act of 2004 included a tax holiday to allow corporations to return overseas funds to America. In his view this act “did little to generate new jobs and investment and resulted in billions in lost revenue.” He suggested that the U.S. companies have “ready access to cash” that has been accumulated overseas. He doubts that a favorable tax rate for returning funds to America “will unlock new investment and job creation.”

Editor’s Note: Both the Senate Finance Committee and the House Ways and Means Committee are holding hearings on major tax reform. It is possible that there will be a comprehensive deficit reduction package with a tax reform component. While it is quite challenging for Congress to tackle both issues at the same time, several commentators suggest that major changes in taxes and spending can only occur in a combined package.

White House Estate Tax Proposals

Each January the White House submits its proposed budget for the fiscal year that starts the following October 1. The White House budget for fiscal year 2012 includes five specific proposals that impact estate taxation and estate planning.

With a $5 million applicable exclusion amount per person for 2011, an estimated 3,600 estates will owe tax. More than 99.8% of 2011 decedents will not be subject to the estate tax with an exemption of $5 million. If the exemption had been lowered to $3.5 million (the rate in 2009), 5,500 estates would be taxable. With an exemption of $1 million (plus indexed increases), Treasury estimates that 40,000 estates would be subject to tax.

The White House budget proposes estate tax changes in the following five areas.

1. Marital Portability – In 2011 and 2012, a spouse may have an increased exemption from $5 million to as high as $10 million. The deceased spouse unused exclusion amount (DSUEA) could increase the available applicable exclusion to double the single person amount. However, because the current law applies for two years, the one spouse would need to pass away in 2011 and the second in 2012 to qualify. The White House budget proposes making the marital portability provision permanent.

2. Consistent Basis – The assets transferred through an estate in most cases will receive a step-up in basis. The proposal creates additional documentation requirements that will insure recipients who later sell assets value the basis in a manner consistent with the claimed estate value.

3. Valuation Discounts – For transfers of real estate, limited partnership interests, family business stock and limited liability company interests, there frequently are valuation discounts that may range from 20% to 40% or more. The White House proposes that these discounts be reduced or eliminated for family transactions.

4. Grantor Retained Annuity Trusts – The GRAT will be limited to a minimum of ten years. In addition, the annuity will not be permitted to decrease during that term. Finally, a remainder value greater than zero must be utilized.

5. Dynasty Trusts – Several states have repealed the statue of limitations. A “dynasty” trust that in theory can be perpetual is therefore possible in these states. The White House proposes that there would be a limit on the duration of dynasty trusts.

Applicable Federal Rate of 3.0% for April – Rev. Rul. 2011-10; 2011-14 IRB 1 (17 Mar 2011)

The IRS has announced the Applicable Federal Rate (AFR) for April of 2011. The AFR under Sec. 7520 for the month of April will be 3.0%. The rates for March of 3.0% or February of 2.8% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2011, pooled income funds in existence less than three tax years must use a 2.8% deemed rate of return. Federal rates are available by clicking here.

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