Saturday, December 26, 2009

Congress Has Adjourned Without Making Changes In Estate Tax Law: Evaluating Your Estate Plan

Congress has adjourned for the year without making any changes in that tax law. Statements have been issued to the effect that the Senate will take up Estate Tax reform in early January, so the issue is still up in the air.

It seemed incredible that Congress would allow some unknown number of days to elapse in January of 2010 during which there would be "no estate tax" yet pass a retroactive bill later.

The concept of "retroactive tax law" is not a strange one, it actually happens almost every year. Most of the time, though the "retroactive" laws apply to the income tax, and such bills benefit taxpayers. This year, there are a significant number of deductions which expire on December 31, 2009 and have not been extended to 2010. Most are expected to be extended "retroactively" sometime in the first quarter of 2010, but most people will pay no attention.

Similarly, at the level of tax regulations (one step below actual statutes or, to put it another way, at the level of "interpretation" of existing statutes) it is common for the Treasury Department or the IRS to issue a formal Notice which states, for example that the tax consequences of a certain type of transaction are under review. Later, often several months to more than half a year later, actual regulations are issued which apply to transactions which occur after the date of the formal Notice.

But the Federal Estate Tax is not a regulation, it's an actual statute, and to politicians on both sides as a concept it appears to draw a strange mix of importance and casual disregard. For example, in early December, the House of Representatives passed an Estate Tax Bill which provides that the current law would remain in effect. The House could have included this bill as part of a mandatory Defense Funding Bill (which I understand had to be passed in 2009) but, apparently because the House figured that the Senate was busy with Health Care, decided not to do so. So it's important enough to pass a bill, but not important enough to actually get it done before the end of 2009.

If it's considered funny, at some level, to make fun of heirs who are greedily waiting for an inheritance, the concept of no estate tax for a defined period of time takes this area of "humor" to a whole new level. The jokes are already starting to flow, at the Huffington Post, Steven Clifford weighs in with a list of things that parents ought to take a second look for now that there is no estate tax in a couple of days, including children removing the steering wheels on their cars or sending texts to parents while the parents are driving.

So as of now, the law remains that the tax will disappear in 2010 before reverting in 2011 to the old rate of 55 percent for estates worth more than $1 million. Thus, if Congress does not act, the repeal is only for 2010. After that, the tax is to be reinstated at pre-2001 levels.

Today, the estate tax applies to estates that are worth more than $7 million (for couples), or $3.5 million (for individuals). More than 99 percent of all estates are exempt. In addition, under today’s law, when heirs sell inherited property, no capital gains tax is due on the increase in value that occurred during the lifetime of the original owner. (If your parents pass on stock worth $2 million that they bought for $200,000, and you sell it for $2 million, you owe no tax on the $1.8 million gain.)

But the big issue today is not the status quo, its retroactivity, what it means, and how it would work. An estate does not have to file an Estate Tax Return and pay the estate tax until nine months after a person’s death. The Senate could wait, then, until the summer to decide on the estate tax and make it retroactive to the beginning of the year.

This does not mean retroactivity will be easy to navigate. Many estate plans name individual relatives (i.e., non-accountants, non-tax lawyers, and certainly "non" Trust Companies) as the executors of Estates or the Trustees of Trusts. Most, if not effectively all, of these individuals are unaware of their personal liability for estate taxes owed. It's almost a statistical certainty that some individual trustee will try to distribute all assets to "beat" the enactment of any law, only to discover that when the law is passed later that they have liability.

It will be an interesting January.

Posted by Henry Moravec, III. Should you have any questions regarding your own situation, you can e-mail Hank Moravec at hm@moravecslaw.com or call him at (626) 793-3210. The firm website is http://www.moravecslaw.com/