Monday, January 4, 2010

QUESTIONS ABOUND REGARDING EXPIRATION OF ESTATE TAX

The time has come to scrape your jaw off the sidewalk. It’s hard to believe, but true—Congress failed to extend the estate and generation skipping transfer (GST) taxes into 2010. In addition, the gift tax rate dropped on January 1st from 45% to 35% and the tax free step-up in basis on estate assets also ended, requiring heirs to plan for post-death capital gains taxes.

The first estate and GST tax returns for 2010 decedents will be due next October (or in April 2011 if an estate takes the automatic six-month extension). This means that Congress could possibly bring these taxes back retroactively by passing legislation any time before then. Another option would be for Congress to avoid the ex post facto constitutional issue by simply restoring the tax prospectively, even though this might allow a relatively few transfers to avoid the tax all together.

It is also possible that Congress will simply do nothing in this year 2010 and wait for the 2011 roll-back of rates and exemption amounts to 2001 levels. At this point, nobody knows what Congress will do; they might even surprise us and take up responsible tax reform this year to permanently fix the situation with long-term guidance. However, we don’t plan on letting our hopes rise that high.

One thing is for sure, if individuals are using a traditional AB or ABC revocable trust, they should definitely have it reviewed with their estate advisor soon. With some revocable trusts, the amounts passing at death to different groups of beneficiaries may be entirely derived by a formula which hinges on the existence of an estate tax. If no estate tax exists, this could lead to disastrous outcomes, even the unintended disinheritance of entire groups of beneficiaries (some trust shares are created only to the extent needed to reduce estate taxes to zero). Even if questions regarding the tax are ultimately worked out, the potential for litigation among and between beneficiaries is huge.

-Attorney David M. Grant

1 comment:

  1. This is for certain an uncomfortable time in tax structuring in areas of estate and regular income tax because of Washington DC's monopolistic manuevers with overconsuming health care and avoiding the looming estate issues. It is unbelievable that all professionals are now stuck dealing with their mess of laws or lack of guidance in many areas. I do not believe that most Americans even grasp the weight of not having the simple "step up" basis allowance currently for estate purposes? To think that most somewhat sophisticated Americans have trouble tracking simple basis in stock sales that are more than 5 years old, just imagine what the unfortunate dying people's beneficiaries are waiting for this year! With both Congress and the Senate looming to likely just let the current tax rates expire at 12/31/2010 and new additional taxes ready on the batting deck, we should all be ready for a rocky road with the current administration in Washington. It will take several years for Americans to wake up and see what our Washington officials have done that will take years to repair. Tighten your seat belts and hold on! Scott Taylor CPA
    Piercy Bowler Taylor & Kern

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