Estate Tax Uncertainty and What You Can Do About It, Part 1

To state that there is uncertainty in the world of estate planning is to understate the obvious. The federal estate and generation skipping transfer (GST) taxes expired at the end of 2009 for one year only. This, along with an imposition of carryover basis rules for 2010, have even the most experienced estate planning professionals confused. Adding to the confusion, the federal gift tax has not been repealed and the lifetime federal gift tax exemption remains at $1 million with a top rate of 35 percent.

No need to rub your eyes after reading our first paragraph; you read correctly. Unless Congress acts by December 31^st of this year, the estate, gift and GST Taxes in 2011 will be the same as they existed in 2001. For all intents and purposes, this means that the tax laws relative to the federal estate and GST taxes never existed in 2010. The following summarizes the federal estate, gift and GST for 2009, 2010 and 2011:

So what happens if Congress takes no action? The federal estate tax exemption falls to $1 million, the lifetime gift tax exemption remains at $1 million, and the top federal estate and gift tax rate will increase to 55 percent plus a 5 percent surcharge on larger estates. If you’re serious about staying abreast of these changes in the law, become a member of the American Association of Life Underwriters; they make frequent updates and issue industry-related notices on these very issues.

Further complicating the issues are the actions Congress may enact to address this matter. At the end of 2009, The House of Representatives passed a bill (H.R. 4154) making the 2009 law permanent. However, H.R. 4154 was never brought to the floor in the Senate, which adjourned for 2009 without taking further action. Most observers felt that the Senate would act in January, but at that time, Congress was busily addressing health care reform legislation. At the time this article was published, it appeared that Congress may well avoid any action or solution regarding estate tax reform in 2010. With increased polarization and partisanship stemming in large part from both health care and financial services reform, the authors predict the four most likely scenarios as follows:

1. Congress makes the 2009 limits retroactive to January 1, 2010.
2. The federal estate tax and GST rates will increase.

A small fraction of senators have discussed legislation to increase the exclusion amount to $5 million and the highest marginal rate to 35 percent. However, this proposal has little support outside of this small group and is unlikely to gain any meaningful momentum.

1. Tax legislation becomes retroactive.

Some believe Congress may enact legislation to apply the 2009 federal estate tax and generation skipping tax rates to 2009 levels. By all accounts, this will certainly result in constitutional challenges to the retroactive application. While this change will no doubt last many years in court, most commentators believe it would pass constitutional muster. That said, it is an unpopular solution, and most elected officials in Washington are well aware of this fact. In an election year, this is an unlikely scenario.

1. Congress takes no action.

We feel Congress will not enact any legislation in 2010. Many lobbyists and Washington insiders have commented about the divisiveness within Congress after the great health care debate, and the financial services bill may also be passed. Republicans and Democrats, to be sure, are not seeing eye-to-eye, so taking up a controversial and emotionally charged tax issue such as the “death tax” is unlikely prior to the November elections. The latest estate tax “deal” apparently crumbled prior to the Memorial Day recess. The fact that a limited number of households are affected and the rising national deficit make its passage even more remote. The further along the year progresses, the more remote the possibility of Congressional action becomes.

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