Estate tax repeal creates dilemma
Spouses of those wealthy who die during 2010 might find themselves with nothing if the wills aren’t revised—another wrinkle of the impending repeal of the federal estate tax which began Jan. 1.
Unless Congress acts to reinstate the estate tax, there is no limit to the wealth that can be passed on to heirs without incurring estate taxes through the end of 2010.
Starting Jan. 1, estate taxes will be repealed for 2010 only. That means unless Congress acts otherwise, there is no limit to the wealth that can be passed on to heirs without incurring estate taxes through the end of that year.
Often, wills have been written with an expectation the estate tax structure that has been in place for years would continue, estate planners say. The wills typically direct that assets that are not subject to estate tax be passed on to children—for 2009, up to $3.5 million—and that the rest go to the spouse.
“You could be in a situation now where everything would go into a trust downstream to the kids and nothing is left to the spouse,” said Greg Rosica, a tax partner at Ernst and Young. “There is a need to revisit the basic estate planning documents to make sure that what you intend to have happen really does happen.”
In 2011, the estate tax is scheduled to return at rates similar to those in place prior to tax cuts enacted under President George W.
Bush. The one-year repeal of the tax next year has been on the books for years, but estate planners and Congress watchers had widely anticipated that congressional Democrats would prevent the repeal from taking effect.
Instead, amid disagreement over the proper level for the tax and preoccupied with health care overhaul legislation, lawmakers punted last week and left the repeal intact—at least for now.
“Ten years ago, there was a lot of gallows humor about repeal when everybody said it would never happen,” said Rep. Richard Neal, D- MA, who chairs the House Select Revenue Subcommittee. “Now, one of those never-happen moments has happened, and nobody’s laughing.”
Neal said “there is no question” that Congress will reinstate the tax, retroactively to Jan. 1, early next year. That is also the intention of Senate Finance Committee Chairman Max Baucus, D-MT. But others aren’t so sure.
“There are plenty of instances where Congress has changed tax laws retroactively, but this one is particularly high-profile,” said George K. Yin, a tax professor at the University of Virginia Law School and former head of the Congress’ Joint Committee on Taxation. “Since Congress has had so much difficulty around a permanent estate tax solution to begin with, there’s no reason to think a retroactive solution would be less controversial.”
The uncertainty has left the rich and their advisers with no end of planning conundrums, and a few opportunities.
In addition to the estate tax, the so-called generation-skipping transfer tax also disappears in 2010. That tax was imposed at 45 percent in 2009 on gifts to grandchildren.
There may be some hardy souls who bet Democrats in Congress won’t succeed in a retroactive extension. These people may try to take advantage of the repeal of the generation-skipping tax by making large gifts to grandchildren. Those gifts would still be subject to the 35 percent gift tax in effect for 2010.
But there is substantial risk in making such a gift. If Congress passes a retroactive law, it could get hit with the 45 percent generation-skipping tax on top of the gift tax at rates up to 45 percent.
“I don’t think many of my clients take that bet,” said Justin Ransome, a partner in the national tax office of Grant Thornton. “If you’re wrong, the toll charge becomes very significant.”
Questions surrounding the treatment of certain trusts in 2010 led some to hurry to get those trusts in place by Dec. 31, said Ernst and Young’s Rosica. That is because tax code language on grantor-retained trusts set up in 2010 is ambiguous and could be interpreted to subject some amounts in those trusts to higher gift tax rates in future years, he said. — DTN