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Estate Tax Reform: Harold Evensky and Diahann Lassus Weigh In

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There is a proposal in the Senate’s pending tax bill, The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, to revamp estate taxes for 2011 from what was scheduled to become law on Jan. 1 if Congress took no action. The current proposal would lower the maximum estate-tax rates, and raise the exclusions, from what they were in 2009.

For 2011 and 2102, this “temporary relief,” according to the draft of the bill, calls for “reinstatement of the estate tax; repeal of carryover basis; modifications to estate, gift, and generation-skipping transfer taxes;” and “applicable exclusion amount increased by unused exclusion amount of deceased spouse.”

“If it goes through as proposed—of course they could change it in January—it’ll mean, for most of us, that the estate tax has become less and less of a problem,” says Harold Evensky (left), president of Evensky & Katz Wealth Management, in Coral Gables, Fla.

According to a CCH Tax Briefing Bulletin on Friday, the proposed bill calls for:

  • 35% maximum estate-tax rate
  • $5 million exclusion for individuals; $10 million for married couples
  • Stepped-up basis for “all assets included in the gross estate”
  • Repeal of carryover basis (used in 2010 on capital gains in estates)
  • Heirs can choose, for those who died during 2010, “carryover basis rules under EGTRRA or the revived stepped-up basis rules under the bill.”
  • Spouses can choose to use the “unused portion of the estate tax exclusion,” of the spouse who died before them

At $10 million for couples—we certainly have some clients it will hit but it’s a relatively small percentage, and I would say that’s true across the board for most advisors. So it will simply minimize the times we get concerned with trying to figure out how to manipulate, manage or avoid [estate taxes]. Joint and survivor insurance sales is likely to drop off,” Evensky explains. “Even at the $10 million [level], the tax rate has dropped significantly, so it makes [joint and survivor insurance] somewhat less competitive as an alternative investment.”

“That’s where the biggest impact is going to be,” Evensky adds, “on those practitioners who make a major part of their business by doing [joint and survivor insurance].”

If the first spouse to die doesn’t need their entire $5 million exclusion, a surviving spouse can use what’s left of that exemption, in addition to their own, boosting the exemption of the second spouse to die. “That’s interesting,” Evensky notes. “That would mean we don’t have to stand on our head to split estates—it would simplify things. We’re often trying to figure out things to equalize estates.”

Changes to the Generation-Skipping Tax, Gift Tax 

The new bill would change the generation-skipping tax (GST) for 2010: “the Senate bill provides for a zero percent GST rate for 2010 and a $5 million exemption.” For 2011, as the pending bill, CCH notes, “reunifies the gift and estate taxes, which were decoupled under EGTRRA,” the rates for 2011 and 2012 would match “the maximum estate tax rates and exclusion,” or 35% and a $5 million exclusion.

Retroactive Choice for Heirs of 2010 Estates

The bill also, according to CCH, adds an option for heirs of those who died in 2010, when there was no “estate” tax but there was a capital gains tax on the estate’s assets, based on a sometimes difficult-to-comply-with “modified carryover basis.” Now heirs can choose either the “modified carryover basis” for the estate’s capital gains or the stepped-up basis that is proposed for the estate tax for 2011 and 2012.

What “really surprised me, [was] looking at the possibility of giving us a choice for 2010,” says Diahann Lassus (left), president of Lassus Wherley, in New Providence, N.J., and Bonita Springs, Fla. “For the estates of people that are “not super-wealthy” and passed away in 2010, “their families could really benefit from having that choice of having that step-up,” instead of the carryover basis that was the rule for 2010 with the sunset of the estate tax at the end of 2009.

“It would be retroactive to Jan.1, 2010, and heirs of those who died in 2010 would have the option…to accept the no-estate tax, as it exists, meaning there would be limited step-up,” Lassus explains. “This year you had zero estate tax but the first $1.3 million in gains you could get a step-up on. You had to figure out all the cost basis and figure out what you wanted to have the step up for—so it was pretty insane to try to do that. If they made this retroactive, people could choose to go under this new bill with $5 million exemption and step-up for more.”

“My assumption is that it’s targeted at the middle wealth folks, with small businesses who really were hurt by the elimination of the estate tax, in some ways, because of the blowing up the step-up for small businesses,” Lassus adds.

‘The Santa Claus Bill’

“The other big surprise is the increase of the generation-skipping tax (GST) and the gift tax to the $5 million level,” Lassus says. “That one will be helpful for everybody that’s trying to pass money to the next generation. The GST “before was $1 million equivalent; this year it doesn’t exist—which is bizarre. Under the new [proposal] it would go to the $5 million and the 35% tax rate would apply for over the $5 million…if it went back to the original tax, it would have been at a $1 million level, so the difference—even if you forget the tax rate—the $1 million versus $5 million is huge for larger estates where they’re trying to pass more money to their kids without tax!”

Clarifying Uncertainty

“I think it’s pretty much a done deal for the Senate—the open question is what happens with the House. The challenge for most of us that are trying to help our clients with their estate planning is how do you plan when you don’t have any real idea of what’s going to happen…From my perspective that’s the most critical piece of this is to get something in place.”

“In some ways it will help regardless of the level,” of rates or exclusions, according to Lassus, because “it will clarify things.”

But it won’t be over until the bill, in its final form, passes. Says Evensky: “I typically pay no attention to tax legislation until it’s passed! I’ve spent way too much time trying to figure it out, plan for it and parse it and at the last minute it gets changed. I just wait until they’re done.”