Lots of people thought Congress would have revived the estate tax by now, making a new law retroactive to the beginning of 2010. That hasn’t happened. Even as a tax bill is being debated in Congress, it doesn’t include a provision for the estate tax, which died at the end of last year.
There is near unanimity that Congress needs to act — preferably soon — but no one knows what will happen, or when. To get enough votes to break the stalemate, some lawmakers have talked about offering a choice to executors of estates of people who die this year before Congress takes action: Use the 2009 rules — or current law.
Under the 2009 rules, the first $3.5 million of an estate typically was exempt from federal estate tax and the top tax rate was 45 percent, although transfers from one spouse to the other typically were tax-free. Under current law, there is no federal estate tax, but many heirs who sell appreciated assets they inherit may face capital gains taxes they could have avoided under the old rules. There is also renewed speculation about other possible compromises. For example, some senators want to raise the estate tax exemption level and slash the top rate.
"We know we have to do something," Sen. Richard Durbin, D-Ill., assistant majority leader, said at a recent conference in Washington hosted by the Baker Hostetler law firm; the Federal Policy Group, a consulting firm; and the Yale Club of Washington D.C.
"I am shocked we’re in May and still haven’t acted," Sen. Susan Collins, a Republican from Maine, said at the same conference. Congressional inaction has made it “impossible” for people to do intelligent estate planning, she added. It also has created thorny problems for lawyers, executors and heirs.
Billions of dollars in revenue are at stake. The estate tax generated almost $14 billion from about 5,500 estates in 2009, according to an estimate by the Tax Policy Center, a joint venture of the Urban Institute and Brookings Institution. It is understood that congressional staffers already have provided lawmakers with estimates of how much offering a choice would cost the Treasury. But they haven’t disclosed those estimates.
In 2011, the estate tax is set to return with a $1 million exemption and a top rate of 55 percent on the largest estates. Some say having no estate tax this year only to have it return next year offers bizarre financial incentives. “It kind of presents a wonderful estate tax plan for those willing to take decisive action,” quipped Ken Kies of the Federal Policy Group and former chief of staff of Congress’s Joint Committee on Taxation. At a recent American Bar Association tax section conference, Ronald D. Aucutt, a partner at the McGuireWoods law firm in McLean, Va., said: “We’ve reached the point that most of us thought was unimaginable.”
If Congress doesn’t act, the federal estate tax in 2011 would generate about $34 billion from about 44,000 taxable estates, according to the Tax Policy Center.
The tricky question of how to value the cost of items in the estate is a factor in the discussions. Past law included what’s generally known as “step up in basis” for inherited assets that have increased in value over the years. The cost basis typically would become the value of those assets on the date of death (or, in certain circumstances, their value six months later). Heirs wouldn’t have to figure out the benefactor’s original cost — and also wouldn't owe capital gains taxes on any increase in value between the time the assets were acquired and the benefactor’s death.
When the estate tax vanished on Jan. 1 of this year, the procedure for determining the cost basis changed. Current law has what’s known as a “carryover basis” for amounts above a certain level. That means heirs need to figure out what the person who died originally paid for assets above a certain amount. That amount gets carried over as the heirs’ cost basis, and would affect the capital gains tax if and when the assets are sold. Critics say this carryover basis system creates burdensome recordkeeping headaches and difficulties in reconstructing what someone who died paid for assets many years before.
A New Choice and Other Possible Compromises
The idea of allowing estates to choose this year’s law or the 2009 version stems largely from fears of a court challenge if Congress were to bring back the 2009 law and make it retroactive to Jan. 1, 2010. Rep. Dave Camp of Michigan, the ranking Republican on the House Ways and Means Committee and the heavy favorite to become chairman of the committee if Republicans capture control of the House in November, mentioned this possibility at the Baker Hostetler conference. Such a court challenge could take many years to resolve. “The longer we go without congressional action, the less likely it is that Congress will make the estate tax retroactive to Jan. 1,” said Herbert Nass, a New York trusts and estates lawyer.
Some experts still think the most likely outcome would be bringing back last year’s law, known as “snapback,” and making it retroactive to Jan. 1, 2010. But lawyers at the ABA tax-section conference said odds are growing for a compromise that would raise the basic exemption level to as much as $5 million, and cut the top tax rate to somewhere between 35 percent and 45 percent. This could be done in one shot — or phased in over several years.
“There is an awful lot of pressure” on Congress to take some actions soon, said Mr. Aucutt of McGuireWoods, adding that inaction has “created lots of disruptions for us and our clients.” Others say it’s highly unlikely lawmakers will act until after the November elections because the estate tax has become such a controversial issue.
One estate tax lawyer has a solution: “Every member of Congress must serve as an executor in 2010.” That, she says, would instantly alert lawmakers to the need for action.
Tom Herman is a former reporter for The Wall Street Journal.
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Related Links:
Rich Cling to Life to Beat Tax Man (MSN Money)
Estate Tax: What You Need to Know for 2010 (CBS Moneywatch)
The Death of the Death Tax (Or: How to Die in 2010) (The Atlantic)