Action this month on legislation restoring the estate tax, even for an interim period, is unlikely, despite the problems the lapse of the estate tax is causing.
Indeed, the situation is so uncertain that officials of the Association for Advanced Life Underwriting can’t even predict what kind of action Congress will take or when. “Things are just too unclear at the moment,” says Sarah Spear, AALU director of policy and public affairs.
The situation was created by Congress’ inability to act before the estate tax lapsed on Dec. 31.
According to Robert W. Cockren, national chair of the trust and estates practice at Sonnenschein Nath & Rosenthal LLP, the lapse of the estate tax as of Jan. 1, raises the potential for endless litigation that could ultimately wind up in the Supreme Court.
“This is a difficult situation, that is fraught with uncertainty for both clients, attorneys and other tax advisors,” says Cockren, who is also co-managing partner of the Short Hills office of SNR.
According to Spear, “the vehicle and timing of a decision remain unclear,” largely because discussions have not resumed at length and the Senate has issues carried over from 2009 that it must address, namely finalizing health care, debating the debt limit, and dealing with extenders.
When the Senate reconvenes Jan. 19, discussions will continue, she says, between leadership and moderate Democrats who supported the approach proposed by Sen. Blanche Lincoln, D-Ark., and Jon Kyl, R-Ariz., for a permanent estate tax with a $5 million per-person exemption, and a maximum rate of 35%.
If the Senate decides to deal with the issue in the short term, provisions doing so could possibly be added to legislation permanently raising the fees paid to doctors through the Medicare program, or in legislation extending certain tax benefits, Spear says.
The issue is a major one to agents and brokers, she adds. “Planning issues around uncertainty continues to affect producers,” she says. These issues, for example, include reviewing the bypass trusts, gifting to grandchildren because of the absence of a generation-skipping transfer tax and carry-over basis issues.
According to Cockren, one of the critical issues is that the lapse of the estate tax without immediate changes to a couple’s will could leave the surviving spouse of the deceased 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, but nothing as of Jan. 1– goes to the surviving spouse.
“Many estate plans are drafted in a way to tie the dispositive provisions to the exemption amount,” he explains.
As a result, he says, “if you have a trust agreement that says, ‘I leave to my trustees the maximum amount that can pass free of the 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 adds.
He also notes that if, as presumed, Congress acts early in this year to restore the estate tax retroactively, there is the likelihood of litigation challenging the validity of retroactivity, and the issue could go to the Supreme Court.