For 2009 the estate tax provides an individual exemption of $3.5 million and a maximum estate tax rate of 45%. There is a consensus that Congress will enact a bill maintaining some of the 2009 estate tax law, but it is unclear what additional provisions such bill would carry. Currently, there are four proposals garnering the most support in Congress and are summarized below.

HR 436 was introduced in the House of Representatives by Congressman Earl Pomeroy (D-ND). This bill eliminates the repeal of the estate tax in 2010 and locks in the 2009 estate tax exemption and tax rate, but provides for a surtax of 5% on estates in excess of $10 million. HR 436 maintains the current step-up in basis provided under current law that adjusts the income tax basis of an asset to its fair market value at the date of the taxpayer’s death. However, HR 436 eliminates valuation discounts for closely held entities that hold non-business assets essentially increasing the value of certain estates. The typical discount currently used for lack of control and lack of marketability ranges from 25-45%.

HR 498 was introduced to the House of Representatives by Congressman Harry Mitchell (D-AZ). This bill eliminates the repeal of the estate tax in 2010 and gradually increases the estate tax exemption from $3.5 million to $5 million between 2010 and 2015 while maintaining valuation discounts.

S. 722 was introduced to the Senate by Senator Max Baucus (D-MT). This bill eliminates the repeal of the estate tax in 2010 and keeps the 2009 estate tax exemption and tax rate, but indexed for inflation. It also does not alter valuation discounts. S. 722 is unique, however, because it provides portability of the estate tax credit between spouses and unifies the gift and estate tax exemptions. Portability allows the second-to-die spouse to use any unused portion of the first-to-die spouse’s $3.5 million estate tax exemption.

The White House has also proposed a plan eliminating the estate tax repeal in 2010 by permanently freezing the 2009 estate tax exemption and rate. Their plan also eliminates valuation discounts and forces a minimum 10 year period for Grantor Retained Annuity Trusts(GRATs).

It seems clear that Congress will enact a bill this year to resolve the estate tax question, at least for 2010, but it is unclear what the provisions of that bill would be.

(Updated December 2009)