Close Close
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards

Financial Planning > Tax Planning > Tax Reform

Experts See Snags If Estate Tax Lapses

Your article was successfully shared with the contacts you provided.

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.

Under current law, the estate and generation-skipping transfer taxes expire at the end of 2009. The gift tax will be retained with a top rate of 35% and an exclusion amount of $1 million. The stepped-up basis at death rules will be repealed and replaced with a modified carryover basis.

Under these rules, the recipient of the bequeathed property would receive a basis equal to the adjusted basis of the property in the hands of the decedent or to the fair market value of the property on the date of the decedent’s death, whichever is less.

Then in 2011, the estate tax would return with an exemption of $1 million and a top tax rate of 55%.

This occurred despite an effort in the House in early December to establish the estate tax at a $3.5 million per-person exemption and a maximum tax rate of 45%.

But the Senate refused to act, even failing to extend current law for 3 months on Dec. 16 at the request of Sen. Max Baucus, D-Mont. They did so because the Democratic leadership could not get the unanimous consent needed to win passage of the short-term extension because Republicans object to the tax.

Congress said before it left that they will revisit the tax early in 2010 and will likely approve retroactive provisions.

“We are in a fluid environment,” said Sarah Spear, director of policy and public affairs for the Association For Advanced Life Underwriting. The timing and vehicle for the 2010 fix of the estate tax remain unclear, but it most likely would reinstate the tax at 2009 levels and retroactively apply the $3.5 million exemption level and 45% percent rate to January 1, 2010, she said.

The AALU is preparing a memo with techniques and analysis of how best to manage a temporary repeal of the estate tax and retroactive application so that insurance professionals can best serve their clients, Spear said.

The memo would address the constitutionality of retroactively extending the estate tax, managing estate tax returns for decedents who pass within the window frame of repeal, how to address the carryover basis rules, and other planning scenarios, she said.

“AALU has not wavered in our advocacy for permanent estate tax reform that includes reunification, portability and indexing for inflation, and only in this rare lawmaking environment has this scenario occurred,” she said. “We will continue to aggressively engage on this issue as reunification is the item that brings lawmakers together from both sides of the aisle,” both in the Senate and the House.


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.