House Passes Estate Tax Relief Legislation

By a vote of 269 to 156, the House on June 22, 2006, passed the Permanent Estate Tax Relief Bill of 2006 (HR 5638). The bill would eliminate the one-year repeal of the estate tax in 2010 and replace it with a permanent estate tax once again unified with the gift tax, and with a $5 million lifetime exemption per person. Any unused exemption of a spouse would carry over to the surviving spouse. In a last minute amendment, the exemption amount would be adjusted for inflation. The estate tax rate would be 15 percent for estates worth up to $25 million and 30 percent for estates worth more than $25 million. This rate is tied to the capital gains rate, which is currently scheduled to return to 20 percent in 2011. The legislation would also eliminate both the state tax credit and state tax deduction, preserve carryover basis, and eliminate the sunset of other estate and gift tax provisions of Economic Growth and Tax Relief Reconciliation Act of 2001. These provisions would be effective for estates of decedents dying, generation-skipping transfers made, and gifts made after December 31, 2009.

One provision not related to estate taxes but designed to attract the votes of legislators from certain timber states would create a new 60 percent deduction for qualified timber capital gains. This provision would be effective as of enactment but expire on January 1, 2009.

While the vote in the House was by a wide margin, its fate in the Senate is not certain. Senator Frist, Senate Majority Leader, has expressed a desire to pass estate relief legislation before the July 4th recess. Senator Grassley, Chair of the Senate Finance Committee, had been promised quick action on a trailer bill of expired and charity-related provisions and may be reluctant to move another tax bill through without those provisions being addressed first or at the same time. Many in the Senate are also concerned about the $284 billion cost of the legislation. Also, particularly in an election year, politics and perceived winners and losers from action on the legislation could influence votes. The Administration, in its first break from pushing for total repeal legislation, has endorsed the House legislation.