House Votes To Extend Estate Tax

The US House of Representatives voted earlier this month to permanently extend the estate tax by a vote of 225-200.  Only Democrats voted for the bill, with 26 Democrats joining Republicans in voting against it. 

The House plan would extend the 45% tax on estates with net asset values of over $3.5 million. With a little estate tax planning married couples are usually able to exempt up to $7 million in net taxable assets. Overall, far less than 1 percent of estates fall into this category.  Under the proposal very few estates of reverse mortgage borrowers will be subject to this tax.  

Under the current plan, the estate tax is set to expire in 2010, only to come back in 2011 with a maximum tax rate of 55%.  It will impact estates with net asset values of more than $1 million, affecting middle and upper-middle class HECM borrowers. As a result, the House plan can be seen long-term as lowering the tax.

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“If nothing is passed, starting in 2011, a significant percentage of the estates of middle class seniors will have taxable estates over $1 million dollars and will be subject to the estate tax,” said James E. Veale, CPA, MBT, and Senior Vice President of Security One Lending.

“If this occurs, a reverse mortgage can become a very useful product for estate planning purposes.  It can provide liquidity to fund such things as gifts, ILITs, and current charitable donations while at the same time creating unique interest deduction opportunities with the balance due at the time of death eligible as a deduction against estate assets up to the value of the home securing the reverse mortgage.”

The Senate has not visited the estate tax issue yet, as it is currently embroiled in the health care debate.  For the bill to become law, it must be approved by both the House and the Senate and signed into law by the President.

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      • That would not be a typical HECM customer. In my 18 years in the HECM origination business, I can count on one hand the number of customers who might have had an estate tax liability.

      • HECM_Dude,

        Exactly what involvement do you have in the estates of HECM borrowers? I find your claims very interesting!

        While I strongly agree most HECM borrowers will never face the estate tax, I have met who reasonably expect their estates will. In one case the borrower has over $9,000,000 of value in real estate, investments, pensions, and other assets even in today’s market. If the unified credit goes down to only shielding $1,000,000 of taxable assets, I know more HECM borrowers to whom this tax will apply, including my neighbor whose home alone is worth over $800,000.

        However, HECM borrowers are hardly the concern. It is proprietary reverse mortgage borrowers who will most likely be hit and at higher percentages than most decedents. Among these borrowers the chances of being subject to the estate tax rise dramatically and can expect to be much much higher than the percent of estates generally, which is estimated at 0.3% (yes, less than 1%) today.

        Just as income tax implications from foreclosure were laughable when I first came into the industry, this topic probably seems just as laughable today. However, just as foreclosure seemed unlikely in late 2004, so does the return of proprietary products to many today.

  • Immoral and unfair, but because it is a small minority of citizens with no lobby group, an easy target for the thieving politicians. Any of the heirs of these estates who protest would be labeled as “greedy and selfish”.

  • Elaborating: what moral right does the government even have to tax someone’s estate? Taxes were once paid when the money was earned so why does the government get to “double dip” and confiscate 45% of an estate after someone passes? Because only the very rich will be affected however, nobody screams about it. Imagine the outcry though if this law were across the board and affected all tax payers. Someone leaving an estate of $100,000 having to pay $45,000 to the federal government would cause a national outcry. I’m simply looking at the morality of taxing someone’s estate. The extension of this law may help us in the reverse mtg industry a little, but it is bad for America because a minority of our fellow citizens are affected and we all go right along with it with no protest.

    • jeffreverse,

      The estate tax regime is much different than you imagine it. First of all estates that have a taxable estate of $100,000 incur a tax due of $23,800 today. However, the unified credit offsets that amount in exactly the same way it does for the estate of Michael Jackson who passed away this year.

      Our current structure starts at a 18% rate and graduates to 45% on the taxable estate exceeding $1,500,000. The unified credit is $1,455,800 for 2009 and applies directly against the tax thus shielding the first $3,500,000 of the taxable estate from the estate tax.

      The estate tax also permits heirs to receive a new tax basis in the assets they inherit. Without it, they would inherit the tax basis of the heir (or in certain cases, if less the fair market value of the asset as of the date of death). As in Canada such a regime would push the estate tax into the income tax making the heirs pay at least as much in income tax as the decedent would have paid. Most income tax practitioners believe the increased revenues to the federal government would be enormous. However, it would be the poorest Americans paying the greatest share of this increased tax.

      Please forgive me if I do not agree with your point of view. Most large estates have sufficient planning to avoid the estate on a large portion of their estate. For example, due to his charitable trust, Bill Gates estate will pay little estate tax even though his heirs will live comfortably administrating that trust.

      Married couples will generally avoid any estate tax on assets exceeding $7,00,000 if the current tax law is extended indefinitely into the future but a little estate tax planning is required to get from $3,500,000 to $7,000,000.

      Plain and simple the etate tax is a redistribution of wealth upon whom it applies. It may be socialistic but it is also reasonably fair.

      • Wow – you’re right. It IS different than I imagine. It’s more convoluted than I thought! My opinion is still the same, however. The taxes were paid when the money was earned and an estate tax is simply immoral and criminal. When Joe Robbie (founder of the Miami Dolphins) passed away, his family had to sell the franchise to pay a reported $47 million in estate taxes. That’s just not right no matter how you slice it. Of course, I’m a free market capitalist and despise any sort of a redistribution of wealth… what can I say. Thanks for confirming my convictions, however! 🙂

  • jeffreverse,rnrnThe estate tax regime is much different than you imagine it. First of all estates that have a taxable estate of $100,000 incur a tax due of $23,800 today. However, the unified credit offsets that amount in exactly the same way it does for the estate of Michael Jackson who passed away this year.rnrnOur current structure starts at a 18% rate and graduates to 45% on the taxable estate exceeding $1,500,000. The unified credit is $1,455,800 for 2009 and applies directly against the tax thus shielding the first $3,500,000 of the taxable estate from the estate tax.rnrnThe estate tax also permits heirs to receive a new tax basis in the assets they inherit. Without it, they would inherit the tax basis of the heir (or in certain cases, if less the fair market value of the asset as of the date of death). As in Canada such a regime would push the estate tax into the income tax making the heirs pay at least as much in income tax as the decedent would have paid. Most income tax practitioners believe the increased revenues to the federal government would be enormous. However, it would be the poorest Americans paying the greatest share of this increased tax.rnrnPlease forgive me if I do not agree with your point of view. Most large estates have sufficient planning to avoid the estate on a large portion of their estate. For example, due to his charitable trust, Bill Gates estate will pay little estate tax even though his heirs will live comfortably administrating that trust.rnrnMarried couples will generally avoid any estate tax on assets exceeding $7,00,000 if the current tax law is extended indefinitely into the future but a little estate tax planning is required to get from $3,500,000 to $7,000,000.rnrnPlain and simple the etate tax is a redistribution of wealth upon whom it applies. It may be socialistic but it is also reasonably fair.

  • HECM_Dude,rnrnExactly what involvement do you have in the estates of HECM borrowers? I find your claims very interesting!rnrnWhile I strongly agree most HECM borrowers will never face the estate tax, I have met who reasonably expect their estates will. In one case the borrower has over $9,000,000 of value in real estate, investments, pensions, and other assets even in todayu2019s market. If the unified credit goes down to only shielding $1,000,000 of taxable assets, I know more HECM borrowers to whom this tax will apply, including my neighbor whose home alone is worth over $800,000.rnrnHowever, HECM borrowers are hardly the concern. It is proprietary reverse mortgage borrowers who will most likely be hit and at higher percentages than most decedents. Among these borrowers the chances of being subject to the estate tax rise dramatically and can expect to be much much higher than the percent of estates generally, which is estimated at 0.3% (yes, less than 1%) today.rn rnJust as income tax implications from foreclosure were laughable when I first came into the industry, this topic probably seems just as laughable today. However, just as foreclosure seemed unlikely in late 2004, so does the return of proprietary products to many today. rn

  • Wow u2013 youu2019re right. It IS different than I imagine. Itu2019s more convoluted than I thought! My opinion is still the same, however. The taxes were paid when the money was earned and an estate tax is simply immoral and criminal. When Joe Robbie (founder of the Miami Dolphins) passed away, his family had to sell the franchise to pay a reported $47 million in estate taxes. Thatu2019s just not right no matter how you slice it. Of course, Iu2019m a free market capitalist and despise any sort of a redistribution of wealthu2026 what can I say. Thanks for confirming my convictions, however! 🙂

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