We already see the beginning of Congressional action on estate, gift, and generation-skipping transfer taxes. Although it is too soon to predict the outcome, H.R. 436, a bill introduced last month in the House of Representatives by Rep. Earl Pomeroy (D-ND), is an example of the issues that Congress and the Obama administration will be addressing in the coming months.

Under current law, the amount of assets which can pass through an estate free of tax (the "estate tax exemption") is $3.5 million in 2009. Current law provides that the estate tax will not apply in 2010, and that the pre-2001 exemption of $1 million returns in 2011. The maximum estate and gift tax rate, presently 45%, will rise to 55% in 2011.

H.R. 436 would amend the Internal Revenue Code to eliminate the one year estate tax repeal in 2010, retain the estate tax exemption at $3.5 million, and retain the maximum estate and gift tax rate at its present rate of 45%. H.R. 436 would also add a 5% surtax for amounts over $10 million up to an amount that would eliminate the benefit of the $3.5 million estate tax exemption, thereby making the estate tax a 45% "flat tax" for large estates.

Current law also changes the income tax basis adjustment taking effect at a person's death. The "step-up in basis" rule currently in effect resets the income tax basis to the fair market value at the decedent's death (or the alternate valuation date six months later if the estate elects alternate valuation for estate tax purposes). However, the "step-up in basis" rule is scheduled to be replaced by a "modified carryover basis" rule in 2010. Specifically, in 2010, the "modified carryover basis" rule will limit the permitted step-up in the basis of assets transferred at death to $1.5 million per decedent, plus $3 million for assets transferred to a surviving spouse. H.R. 436 would amend the Internal Revenue Code to rescind this scheduled change and maintain the "step-up in basis" rule in 2010 and beyond.

Finally, if H.R. 436 becomes law, appraisers valuing assets transferred after its enactment would not be allowed to apply any discounts to "nonbusiness" assets (including passive assets, with the exception of working capital) held by partnerships or other entities. Instead, those assets would be valued as though they were transferred directly to the recipient. For example, if $1 million held by a partnership consisted of cash and/or marketable securities, a 10% interest in the partnership would be valued for gift and estate tax purposes at $100,000, even if a willing buyer might pay only $60,000 for the interest because of an otherwise applicable lack of marketability discount.

Even more significantly, under H.R. 436, if a family controls a business entity that is not "actively traded," no discounts will be allowed for the transferee's lack of control of the entity, in contrast to current law that allows for minority interest discounts. Such a change would substantially reduce a parent's ability to transfer minority ownership interests to children in a tax-efficient manner.

Although H.R. 436 may or may not become the template for changes in the tax law, it highlights the key issues that will be considered in the coming months.