On January 9, 2009, Rep. Earl Pomeroy (D.-North Dakota) introduced H.R. 436.This bill would do three things.
First, it would make the 45 percent estate tax bracket, currently in effect (for 2009), permanent. In other words, the estate tax would not disappear in 2010 and then come back in 2011 at the old (graduated and, at the top bracket, higher) rates.
Second, it would make the $3,500,000 per-person lifetime transfer tax exclusion, currently in effect (for 2009), permanent. As above, the estate tax would not disappear in 2010 and then come back in 2011 with a $600,000 exclusion.
Third, it would eliminate lack of marketability and minority interest discounts for transfers of passive assets to family members. For example, if a family business has $1,000,000 of liquid assets in it which are not needed for the business, a transfer of a 25 percent interest in the business would be valued by first removing the liquid assets. The gift of the 25 percent interest in the liquid assets would be worth $250,000. As the law currently exists, if the gift of a 25 percent interest in the business is subject to a combined 40 percent discount for lack of marketability and lack of control, then the $1,000,000 of liquid assets is also subject to that same discount.
Separate from the loss of all discounts on liquid assets, any transfer of an interest in a family business entity would lose the discount for lack of control (but not for lack of marketability).
The loss of the valuation discounts would (i) threaten the livelihood of a lot of business appraisers and (ii) make the discounts inherent in such tax planning structures as GRATs (grantor retained annuity trusts) and QPRTs (qualified personal residence trusts) that much more important. As with any change in the law, if those discounts are removed, people are going to want to know why their lawyers didn't advise them to take advantage of them while they were still available.
So the conclusion is that now is the time to get estate tax planning down for our wealthy clients—just in case that part of the bill passes. Prediction: the first two parts will, and the removal of discounts will not.