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Archive for December, 2009

Welcome to Repeal of the Estate Tax?

Sunday, December 20th, 2009

Late in the evening of December 16, 2009, the United States House of Representatives adjourned for the Christmas Break and is not scheduled to reconvene until January 2010. This means the estate tax and the generation-skipping transfer (GST) tax will be repealed as of January 1, 2010, because the Senate, although still is session, has yet to pass any legislation on retaining the estate tax in 2010. On December 3, the House passed H.R. 4154 which would permanently extend the current estate tax law with a $3.5 million exemption and 45% rate for estate, gift, and GST tax purposes. Although the Democrats subsequently tried to move a two-month extension of the present transfer taxes in the Senate, it was unable to find the 60 votes necessary for the bill to be considered. Most, if not all, of the Republican Senators and some Democratic Senators (if they cannot achieve full repeal) would like to see an increased exemption, such as $5 million, and a lower rate, such as 35%. Even if the Senate acts before the end of the year (which is unlikely at best), the House would not be in session to consider any bill passed by the Senate. The only way that legislation could be enacted this year is for the Senate to pass H.R. 4154 without any changes to the House bill. Given the Senate’s refusal to pass a two month extension, this seems highly unlikely.

Many believe that legislation to permanently fix the estate and GST taxes will be introduced in Congress early next year. However, because the current estate tax law will expire January 1, 2010, that expiration will create at least temporary uncertainty and confusion for many individuals in planning their estates. The longer that Congress delays in enacting a solution, the greater the uncertainty and confusion.

There are three possible resolutions to the current situation. First, if Congress fails to act next year, the estate and GST tax regime in place prior to 2002 with a 55% rate, a 5% surcharge on estates between $10,000,000 and $17,184,000, and a $1 million exemption will be reinstated on January 1, 2011. During 2010, the gift tax will still be in place with a $1 million exemption but a lower 35% rate.

Another possibly dramatic consequence of a failure by Congress to act next year will be the substitution of a carryover basis regime for the repealed estate tax. Under current law, a decedent’s heirs receive assets with basis for computing capital gains taxes equal to the fair market value of the decedent’s assets on the date of death. On the assumption that a decedent’s assets will have increased in value between the dates of acquisition by the decedent and the date of the decedent’s death, this basis adjustment is usually referred to as a “basis step-up.” In 2010, if Congress fails to take action, the step-up in basis goes away for one year and instead the heirs of a decedent take the decedent’s basis in the property. This is often referred to as a “carryover basis.” There are, however two major exceptions. The assets of every decedent will be eligible for a $1.3 million increase in basis. In addition, assets passing to the surviving spouse of a decedent will get an additional $3 million increase in basis. These exceptions will prevent the imposition of carryover basis from affecting many decedents, but others will be affected.

The second possible resolution is a temporary extension of some specified duration of the current law with the $3.5 million exemption and 45% rate.

The third possible resolution is for Congress to enact some permanent fix for the estate tax and the GST tax that will be effective in 2010 and beyond. Either a temporary or permanent fix will probably require 60 Senators agreeing on the fix with the likely areas of disagreement being the amount of the exemption and the rate of tax.

If legislation is passed in 2010, one concern of some observers is whether any legislation enacted next year to temporarily or permanently fix the estate and GST taxes can be effective retroactively back to January 1, 2010. For example, if Congress passed new estate tax legislation in February 2010 and stated that the effective date is January 1, 2010, would an individual who died in January 2010 be subject to the retroactively imposed estate tax or would that individual’s estate escape estate tax but be subject to additional capital gains tax because of carryover basis? There is no clear consensus on this and, if this situation occurs, there undoubtedly will be litigation. Some people may be tempted in 2010 to take advantage of the lower 35% rate for gifts (particularly those to “dynasty” trusts) under the current law during the period before Congress acts (assuming that Congress acts). Because there will be no GST Tax during this window (assuming that any fix is not retroactive), one could, for example, gift unlimited amounts to a trust for children, grandchildren, and more remote descendants without GST tax consequences (although gift tax would have to be paid once the $1 million exemption is exceeded, although it would be at a lower 35% rate).

As can be seen, the legislative status of the estate and GST taxes is cloudy with no clear resolution currently in sight. Individuals must carefully examine their options in this confusing environment in planning their estates and they should consult with their advisers before taking any steps. Because many estate plans contain formula provisions tied to the marital deduction and to the estate tax and GST exemptions, a careful review of all wills and trusts is appropriate at this time. Advisers need to stay of top of the possible changes in Congress to properly advise their clients. We are closely following the status of the estate tax, gift tax, and GST tax in Congress, and are ready to help individuals and professionals understand and work their way through the current legislative morass to find the appropriate estate planning solutions.

Teaching

Thursday, December 10th, 2009

I’ve begun teaching some courses for a company called Surgent McCoy, which specializes in courses for CPAs to get their educational credits.  This November and December, I taught The Complete Trust Workshop and The Complete Guide to Trusts and Estates.  I’ve gotten some great feedback on these courses, see one of the attendee’s blog posts about me, here:

http://brainsonfire.com/blog/index.php/2009/12/01/what-cpas-can-learn-from-storytelling/