Congress Lets Estate Tax Expire, But May Act Retroactively
Happy New Year! I hope you enjoyed the Holidays with your family and close friends. Well, despite my last post about the pending estate tax legislation, there is currently no tax on the estates of those dying during 2010! Although Congress may reinstate the tax retroactively in 2010, perhaps as part of broader tax reform, this is not a certainty. Burned by their near-universal conviction that Congress would act to preserve the tax before it expired on December 31, 2009, experts are now wary of predicting what lawmakers will do.
If Congress fails to act, a few thousand very wealthy families will have reason to celebrate, while tens of thousands of taxpayers of more modest means will pay capital gains on inherited assets thanks to the end of the basis step-up and the start of modified carryover basis rules. In addition, executors will face confusing administrative burdens, and married couples with credit shelter trusts may want to revise their plans, at least for 2010. And if Congress does change the law retroactively, extensive litigation over inheritances is almost guaranteed.
The chief tax counsel for the House Ways and Means Committee estimates that while extending the 2009 estate tax law would have affected about 6,000 estates, 71,400 estates could face new capital gains taxes with the estate tax gone. According to the Center on Budget and Policy Priorities, "at least 62,500 of these are estates that would not owe any estate tax if the 2009 rules were continued and that thus would be adversely affected by estate tax repeal. Farm and business estates would constitute a disproportionately large share of this group." (Small farms and businesses are the groups whose interests opponents of the estate tax have claimed they are defending.)
The Perils of Going Retroactive
Senate Finance Committee Chairman Max Baucus (D-MT) has pledged to try to restore the estate tax retroactively in 2010. This would undo the capital gains increase, but it could also create fertile ground for lawsuits by those whose family members die between January 1, 2010, and the date when any retroactive law is enacted.
"I can guarantee this: if they succeed in getting retroactive in hiking the death tax from zero to 45 percent, there are going to be lawsuits," said Dick Patten, president of the American Family Business Foundation, which opposes the estate tax. "Its going to be messy, its going to be noisy." (For an excellent discussion of the mess that a lapse in the estate tax could create, see this article by Forbes.com. "Beneficiaries will deal with uncertainty for years," warns one tax expert.)
What to Do?
In the meantime, estate planning attorneys and their clients are trying to figure out what to do. Particularly vulnerable are married couples with credit shelter trusts that are designed to allow both spouses to take advantage of their respective estate tax exemptions. With the estate tax gone, the wording of these trusts could be interpreted as completely bypassing the surviving spouse when the first spouse dies, meaning a surviving spouse would get nothing without claiming an elective share. (For commentaries, click here and here.)
Along with the estate tax, the generation-skipping transfer tax also disappears in 2010. Some wealthy individuals may bet that Congress won't extend the law retroactively and therefore make large gifts to grandchildren.
"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), chair of the House Select Revenue Subcommittee. "Now, one of those never-happen moments has happened, and nobody's laughing."
For more on the implications of the disappearance of the estate tax, see the Future of the Estate Tax blog.
