Estate tax levels would return to 2009 levels under the Obama administration’s first proposal to Republicans on how to avert the fiscal cliff.
The administration proposal on the estate tax was part of a plan presented Thursday by Treasury Secretary Timothy Geithner to House Speaker John Boehner.
In general, it calls for $1.6 trillion in tax increases over 10 years, $50 billion in immediate stimulus spending, home mortgage refinancing and a permanent end to congressional control over statutory borrowing limits.
The first reaction from insurance agents—who will be primarily affected by whatever is decided—is that what is important is certainty, that Congress must adopt policies that are permanent and don’t change every two years, as is the current situation.
“Obama’s proposal clearly shows, in our opinion, that even if we get a final package, nothing is likely to be completed for at least a few weeks, as this is just the beginning of the give and take of the negotiations,” said Joe Lieber of Washington Analysis. This group advises the buy-side of the investment community, institutional investors and hedge funds.
“We wait to see if and when House Speaker John Boehner, R-Ohio, follows through with a more comprehensive plan of his own that counters the President’s,” Lieber said.
He noted that Thursday, “Boehner pointed to the House-passed budget as his template, which is of course a non-starter for Democrats.”
Lieber added, “It remains to be seen, however, if [Boehner] will actually offer up a detailed fiscal cliff-only proposal.”
Robert Smith, president of the National Association of Insurance and Financial Advisers (NAIFA), reiterated NAIFA’s support for “meaningful, sustainable estate tax reform that provides certainty for clients to do their planning and take action.”
Unfortunately, he said, “the enormous uncertainty in the political environment, and rules that are not permanent, presents greater challenges for NAIFA members to serve their clients.”
Under the new administration proposal, the estate tax would rise from the current $5 million per-person exemption and 35 percent rate to a $3.5 million exemption and a 45 percent rate. The estate tax proposal is the same as in 2009 under a transition to a zero level in 2010 included in the 2001 Bush tax cut plan.
Chris Morton, vice president of legislative affairs at the Association for Advanced Life Underwriting, says the AALU has long been “comfortable” with the proposed exemption level and top tax rate. He adds that a return to the 2009 estate tax regime would provide an estimated additional $100 billion in tax revenue over 10 years.
“What we want to see is a permanent estate tax, including an extension of the unified credit under current law,” says Morton. “This will allow our members’ clients to plan over a longer time horizon. The biggest challenge for financial professionals now is dealing with uncertainty over changes in the tax code.”
Until Congress enacted a transition plan in 2010, the estate tax would have returned to a $1 million level and a 55 percent maximum tax rate in 2011 because the Bush tax cut program ended in 2010. However, the two-year transition plan enacted in 2010 sweetened the policy to the current $5 million per-person exemption and 35 percent tax rate.
According to LOMA, If Congress agrees to the compromise of a $3.5 million exemption and 45 percent tax rate, 3.6 million households (slightly higher than three percent) would have a potential estate tax liability.
The average tax owed for these families would be $2.6 million. According to LIMRA’s analysis, 53 percent of these households do not have enough coverage to pay the tax. On average, these households would still owe $3 million.
If Congress fails to act, 14.7 million U.S. households would have a potential estate tax liability, LOMA said.
The average tax due for these families would be $1.4 million. While households can use life insurance proceeds on the deceased to pay the estate tax, LIMRA analysis indicates that 55 percent of these households do not have enough coverage to pay the tax. On average, these households would still owe $1.6 million.
If Congress extends the existing law, 2.4 million households (slightly higher than two percent) would have a potential estate tax liability, LIMRA said.
At a 35 percent tax rate, the average tax would be $2.4 million. LIMRA’s analysis shows that 43 percent of these households do not have enough coverage to pay the tax. These households would still owe, on average, $3.1 million.