Uncertainty Abounds with Estate Tax

Both the American Institute of CPAs and the American Bar Association Section of Taxation have urged Congress to correct the current state of federal estate, gift and generation-skipping transfer taxes.

In recent letters to Congressional lawmakers, both bodies stressed the uncertainty affecting taxpayers and their advisors.

“The expiration of the estate and generation skipping transfer (GST) taxes at the end of 2009 and the imposition of the carryover basis rules are causing tremendous uncertainty for taxpayers and their advisers,” stated the AICPA.

“The planning and administration of estates, and the administration of the income tax, are all significantly affected by the undecided future of these transfer taxes,” it continued. “The possibility of re-enactment for 2010, the future of the tax systems for 2011 and beyond, and the practical problems of identifying costs that must be considered as part of tax basis for assets distributed from estates created after December 31, 2009 are the most pressing concerns in this area.”

A huge concern is whether or not carryover basis will apply to the assets left to surviving spouses and family members, according to Eileen Sherr, tax senior technical manager at the AICPA.

“People are dying every day, and they need to know whether they should sell certain assets or not, what records they need to keep, and will any potential fix be retroactive,” she said. “Also, do they need to revise their wills and trusts? If someone were to die, their will may carry out their desires the way the law is right now, but it may not be that way a month from now, so they don’t know whether to change the will or not.”

“You feel you have to do something for clients in the unlikely event one of them were to die this year,” agreed Lawrence Peck, a New York-based estate attorney. “One of the issues is whether your estate will go to the right beneficiaries, because, for example, the credit shelter trust and marital bequest are drafted using formulas that are geared to the federal estate tax. Now you have to look at wills to see how the formula would operate if there is no federal estate tax.”

The ABA Tax Section noted that the changes under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) created dilemmas in the interpretation and administration of the tax law that are uncommonly difficult because, unlike most income tax changes, it is a suspension of two entire tax systems, not just a temporary change in the rules affecting those tax systems, and it affects taxes that are applied on a continuous basis, not tied to transactions or calendar years.

“For many of the taxpayers who are subject to estate tax, planning in 2010 has either stopped because no one knows what to do, or is proceeding frantically to cover all possible outcomes in an environment in which no one knows what works,” it stated.

A big uncertainty is the gift tax rate, noted Sherr. “We don’t know if it will stay at its lower rate [35 percent] or move back to the higher rate [45 percent].”

In fact, the potential increase in the gift tax rate could present a planning opportunity, if it were more certain, according to Peck. 

“To the extent you want to incur a gift tax this would be the year to do it, assuming no retroactive installation of the system back to January 1,” he said. “That’s one of the problems of trying to plan because we don’t know if there will be any action this year, and if there is, we don’t know if it will be retroactive to January 1. And the longer we go through 2010, the more likely it is that any action will not be retroactive to January 1.”

Though there are numerous legislative “fixes” currently before Congress that would restore the 2009 rates, it is uncertain that any will pass, observed Sherr. “It’s uncertain whether or not they will act this year, and it’s certainly possible that they will let the whole year go by and do nothing,” she said.

“The consensus seems to be that Congress will re-enact the estate tax law exactly as it was in 2009, so you’re in good company if you believe that,” said Peck. “Of course, since the passage of the health care legislation, it’s not clear if Congress will agree on anything, so there’s the possibility that nothing will be done this year and the estate tax will come back in January 2011 as it was pre-EGTRRA.”

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