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.
Cockren says there have been cases that have gone to the Supreme Court that have upheld the validity of retroactive tax provisions.
But, he adds, "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, he adds, among tax lawyers as to how the constitutionality of retroactive change would ultimately play out. "The failure of Congress has caused significant confusion among tax practitioners," he says.
"If you believe there will be some political compromise, and that the estate tax will be modified in some way to make it permanent, then you will advise clients to hold on and see what happens," he says. "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.
According to the Journal, there was no estate tax from 1870 to 1898; it was repealed in 1902, then reinstated in 1916.
Under current law, the estate and generation-skipping transfer taxes expired at the end of 2009. The gift tax was retained with a top rate of 35% and an
exclusion amount of $1 million; the stepped-up basis at death rules were repealed and replaced with modified carryover basis.
The rule currently in effect will be that the recipient of the bequeathed property will receive a basis equal to the lesser of the adjusted basis of the property in the hands of the decedent, or the fair market value of the property on the date of the decedent's death.
Then, in 2011, the estate tax will 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 to the extent of extending current law for three 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 it will revisit the tax early in 2010 and will likely approve retroactive provisions.
On the agents' part, Spear says, "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.
"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, she says.
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