Experts aren’t sure if the tax hiatus is a loophole or pitfall for estates. With taxes set to begin again in 2011, estate planners now wait and wonder how to determine a client’s current estate tax obligations.
In 2011 the estate tax is scheduled to return at a rate similar to that in place prior to tax cuts enacted under President George W. Bush. The one-year repeal of the tax this year has been on the books for years, but estate planners and congress watchers have widely anticipated the congressional democrats would prevent the repeal from taking effect.
Instead, amid disagreement over the proper level for the tax and preoccupation with health care overhaul legislation, lawmakers punted last year and left the repeal intact. Congressman Richard Neal (D-Mass.) said in a recent Wall Street Journal interview “Ten years ago, there was a lot of gallows humor about repeal when somebody said it would never happen.” Neal chairs the House Select Revenue Subcommittee. “Now, one of those never-happen moments has happened, and nobody’s laughing.”
Mr. Neal said “there is no question” that Congress will reinstate the tax, retroactive to January 1. That is also the intention of Senate Finance Committee Chairman Max Bacchus (D-Mont.). But others aren’t so sure.
Veteran estate planner Steven J. Oshins, said in an interview with The Trust Advisor yesterday, “I am anticipating Congress will try to adopt an estate tax that is retroactive to January 1, 2010 in an attempt to fix the problem. However, it is not clear that a retroactive estate tax would be constitutional.” Oshins added, “It is likely that there will be many lawsuits brought by wealthy families of decedents who die in 2010 prior to a retroactive estate tax system being adopted.”
University of Virginia Law School Tax Professor George K. Yin, said in a Wall Street Journal interview last week, “There are plenty of instances where Congress has changed tax laws retroactively but this one is particularly high profile. Since Congress has had so much difficulty around a permanent estate tax solution to begin with, there is no reason to think a retroactive solution would be less controversial.” There are big questions on whether the Democrats will even succeed with a retroactive extension.
All of this uncertainty has left the rich and their financial advisors with no end of planning conundrums and few opportunities. In addition to the estate tax, the so-called generation-skipping tax also disappears in 2010. That tax was imposed at 45 percent in 2009 on gifts to grandchildren.
Multimillionaires might try to take advantage of the repeal of the generation-skipping tax by making large gifts to grandchildren in 2010. However, according to Oshins, those gifts would still be subject to a 35 percent gift tax still in effect for this year.