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December 29, 2009 at 07:00 PM
WASHINGTON–The lapse of the estate tax as of Jan. 1, 2010 raises the potential for endless litigation that could ultimately wind up in the U.S. Supreme Court, a trust and estates tax lawyer warns.
Prompt congressional action will be needed in the new year to extend the tax, says Robert W. Cockren, national chair of the trust and estates practice at Sonnenschein Nath & Rosenthal L.L.P., Washington. The uncertainty created by a failure to extend the tax in some form could thwart the estate plans of anyone who dies during the period before Congress acts in on the issue, he warns.
“This is a difficult situation that is fraught with uncertainty for clients, attorneys and tax advisors,” said Cockren, who is also comanaging partner of the Short Hills, N.J. office of SNR.
One key implication is that the surviving spouse of the deceased could be left empty-handed. That is because many wills specify that everything above the amount of the exemption under current tax law, $3.5 million in 2009, goes to the surviving spouse.
“Many estate plans are drafted in a way to tie the dispositive provisions to the exemption amount,” he explained. As a result, “if you have a trust agreement that says, ‘I leave to my trustees the maximum amount that can pass free of estate tax and leave the residual to my spouse’, the spouse would be left with nothing. There are many, many trusts that provide this,” he said.
He also notes that if Congress acts early in the new year to restore the estate tax retroactively, as expected, there is the likelihood of litigation challenging the validity of retroactivity. That issue could go to the Supreme Court, he says.
Cockren says there have been cases that have gone to the Supreme Court that have upheld the validity of retroactive tax provisions.
However, he says, “it is interesting to note that the chief counsel of the House Ways and Means Committee has drafted an opinion that making a future tax law change retroactive to Jan. 1, 2010 would not be constitutional.”
There is disagreement among tax lawyers as to how the constitutionality of retroactive change would ultimately play out, he added.
“The failure of Congress has caused significant confusion among tax practitioners,” he said. “If you believe there will be some political compromise and that the estate tax will be modified in some way to be made permanent, then you will advise clients to hold on and see what happens. There are others who believe that there are both problems with clients revising their estate tax documents or potential opportunities in the new year.”
Expiration of the estate tax at the end of the year marks the first time since 1915 that there has been no estate tax, according to the Journal of Financial Services Professionals. There was no estate tax from 1870 to 1898. It was repealed in 1902, then reinstated in 1916, according to the Journal.
