Estate Taxes

Beating the Estate Tax to Death

Sponsored by by Eva Rosenberg

Wednesday, December 23, 2009provided by

With estate tax set to end this year, retroactive lawmaking in 2010 is likely
While the House recently passed a bill to reinstate the estate tax in 2010, last week the Senate rejected a measure to temporarily extend it. But the Economic Growth and Tax Relief Reconciliation Act of 2001 legislation will not be allowed to stand, says Larry Richman, chair of Chicago-based Neal, Gerber & Eisenberg's Private Wealth Services Practice Group.

Look for retroactive action
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Richman is right. On Dec. 3, the House of Representatives voted to permanently extend the present 45% estate tax rate, and the $3.5 million, per person, exclusion from estate taxes. While everyone was expecting a one-year extension, no one was expecting any permanent legislation while Capitol Hill is embroiled in the health-care debate.

For a married couple, this means that up to $7 million worth of assets would be excluded from estate taxes. That excludes nearly 60% of all estates. Based on 2008 filings, 22,642 estates out of a total filed of 38,373 are under $3.5 million, according to IRS data.

This did not sit well with the Senate. Democrats and Republicans are at odds over the tax rate and the exclusion amount. Democrats in general are ready to approve the House version, while some Republicans prefer a lower tax rate of 35% and a higher exclusion of $5 million. The end result: The Senate did not pass an estate-tax extension.

Still, there is little doubt the Senate will tackle this in the beginning of 2010. Generally, when a law is passed, it becomes effective on the date of passage. However, this law will be an exception. In order to avoid a complete repeal of the estate tax in 2010, this law is expected to contain a provision making it retroactive to Jan. 1, 2010, according to Wayne Otchis, a certified public accountant in San Diego. Otchis spoke at a Spidell Publishing Inc. (http://www.caltax.com/) tax update seminar in Woodland Hills, Calif. on Wednesday.
The end of the estate tax?

What if Congress does nothing and estate taxes really are repealed?
As we all know, nothing is certain except death and taxes. There is a chance that the Senate will debate this issue to death and no action will be taken at all. What then?

Bruno Graziano, a senior writer and analyst in the estate planning group of CCH, a Wolters Kluwer business, explains the implications for estates originating in 2010. In other words, for folks who die in the coming year.
The good news is, if Congress doesn't act, there will be no federal estate taxes at all. Businesses, stocks, and other assets can be passed on to heirs without being hit with tax rates as high as 45%.

The bad news?

• There are still state estate taxes to consider.
• There will be only a limited step-up in basis. Under current federal estate tax laws, the assets of the deceased get a step-up in basis to the fair market value at date of death (or 6 months later). This eliminates capital gains taxes when heirs sell assets. In 2010, if the estate tax is repealed, the step-up in basis is limited to $1.3 million for the overall estate, plus $3 million for assets transferred to a surviving spouse.

• If Congress doesn't take any action at all, in 2011, the pre-EGTRRA levels return -- estate taxes on all estates over $1 million, with federal tax rates up to 55%.
What not to do this year:

Since there is still confusion about the state of the estate tax, MarketWatch asked Graziano for some guidance on how to avoid foolish actions in 2009. He said:

• Don't believe that the estate tax is going away permanently -- all indications are that it will remain in some form after 2009. Even if Congress does nothing before year-end and allows the repeal to occur, they could reinstate the tax retroactively during 2010 or just wait for the EGTRRA sunset to occur and let the pre-2001 law come back in 2011.

• Don't abandon existing gifting plans for family and charity on the assumption that the estate tax is going away.

• Even without an estate tax, don't forget about estate planning. Other issues such as asset protection, dysfunctional family situations, disposition of retirements assets, and business succession issues can be just as important, if not more so, than the traditional transfer tax issues.

What can you do in the meantime?

Larry Richman suggests this may be a good time to do some last-minute planning to lock in the $3.5 million exclusion while it's still available. Since there are only a few days left this year, if you're really concerned, bully your way into your estate tax professional's office and start asking about Q-TIP trusts (qualified terminable interest property), generation-skipping trusts, reverse Q-TIP elections, and so forth. You can find some pretty useful information, as a starting point, in an "Introduction to Estate Planning" by attorney Robert L. Sommers. See the article on FindLaw.com. Also, see this useful page on the New York State Society of CPAs site, about EGTRRA.

Or you could have faith, and believe that the Senate will hammer out permanent estate tax legislation that will be retroactive to Jan. 1, 2010. Do you believe?
Eva Rosenberg is the founder of TaxMama.com and an enrolled agent licensed to represent taxpayers before the IRS. She is the author of the new e-book, "The 100% Home-Based Business Tax Solution." Reach her at taxwatch@gmail.com .

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