Wednesday, December 30, 2009

Now What.... Estate Tax in Limbo

Okay, so it seems like there's a big hiccup in the proposed extention of the estate tax law. Basically congress failed to finalize any changes in that tax law. It is expected that they will resume after the holidays but until then, we are all in planning limbo.

What is also at issue is if/when they do enact a new tax law, will it be applied retroactively. The court have upheld a retroactive application of income tax laws, but the issues as it pertains to estate tax has not yet been faced.

Here's the rub: See, typical tax issues are "regulations" and not "statutes". They are handled differently. Courts can can "interpret" statutes to tell us how they apply. On the otherhand, the IRS can simply issue a formal "Notice" explaining that the tax consequences of a certain type of transaction that is under review and then later apply a "regulation" to apply.

Now with respect to the Federal Estate Tax issue, it is NOT a "regulation", but rather an actual "statute" so some elected officials see it as importants (like a statute) where others are much more casual about it like they are with "regulations".

For example, on December 4th, the House of Representatives passed an Estate Tax Bill which provides that the current law would remain in effect. The House did not including it in any bills to be passed by the senate by the end of the year. (Senate is busy with health care, go figure)

So, maybe people think no estate tax is a great thing if you die in 2010. The grass is not always greener though and kids, don't think that this is the perfect opportunity to wait until Jan 1 to pull the plug on the heart and lung machine.

As it stands today, we are back where we started.... no estate tax for 2010 and in 2011 it will revert back to the old rate of 55% for estates over $1 mill (all the more reason to rejoice in this horrible houseing market, no?)

For two more days at least, married couples (with proper trust planning) can shelter up to $7 million ($3.5 million for individuals). Anything over that is subject to 45% estate tax. So when heirs sell inherited property, little or no capital gains tax is due on the increase in value that occurred during the lifetime of the original owner because the inherited asset is "stepped-up" in value based on the value at the date of death.

So what does this mean if there is a new estate tax law passed later in 2010 and it is applied retroactively. Say mom and dad pass in January, you file to estate tax return, but then the law is enacted in June, now you have to go back and refile and pay taxes. What if all the money has since been dispersed, invested, spents, etc. The trustee alone may be personally liable to pay for any owed estate taxes.

So it may be a good time to plan properly to protect your heirs during this time of tax limbo.

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