Updates on the Federal Estate Tax Law

Recently, there was a report that President Barack Obama and Democratic lawmakers planned to freeze the estate tax at the current level of $3.5 million exemption per estate, which would avoid the short-lived one year repeal of federal estate taxes in 2010, with the income tax return in the following year with just a $1.0 million exemption, along with a tax rate of as much as 55%.

The U.S. Chamber of Commerce just recently advised President Obama to rescind the tax for great. The Chamber obviously senses that the tax threatens a small company whose proprietor dies, leaving a variety of financial obligations behind, including the Federal Estate Tax concern, that could require the owner’s family to liquidate the family business.
Towards the end of January, Rep. Earl Pomeroy introduced HR 436, which would cap the federal estate tax exemption at $3.5 million and set the tax rate for estates that exceed that amount at 45% (50% for estates between $10 million and $23.5 million). This part of the expense is amenable to a lot of individuals, assuming that Congress will not completely reverse the Federal Estate Tax, as the U.S. Chamber urges.

The issue with the expense is that the law would be altered to not allow an appraiser to take any discount rates for a minority interest or lack of marketability in an entity that is not actively traded. For instance, if you own a 10% interest in a partnership, your estate would report that you owned that 10% and value it at 1/10th of the total fair market price of the underlying possessions, even though you do not have any control of the collaboration and do not have the ability to sell your interest. If you did have the ability to offer your interest, the potential buyer would most likely offer you less than 1/10th of the fair market worth of the underlying possessions, considering that you do not have control and there is a minimal market.
This means that your estate will show the complete 1/10th of the full fair market price of the underlying properties, although if such possession were sold, your estate would be paid less for it.

While the use of discount rates has been a subject of abuse in particular cases, it is obvious that discounts must be permitted to mirror financial truth in following what a ready purchaser would pay a ready seller where there is a limited market for the interest and no control. Ideally, this portion of the costs will be altered prior to it ends up being the law of the land.