Future of the Federal Estate Tax

The IRS discusses the “big changes” to federal estate, generation-skipping transfer, and gift taxes in 2010

The Internal Revenue Service has published guidance on the repeal of the federal estate and generation-skipping transfer taxes in 2010. 

[1] 2010 Brings Big Changes to the Estate and Gift Tax

The IRS discusses the 2010 repeal of the federal estate and generation-skipping transfer taxes and the reduced gift tax rate:

In 2001, the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA") was enacted. EGTRRA made a number of significant changes to the Federal estate, gift, and generation-skipping transfer (“GST”) tax laws.

The most significant change for 2010 is the repeal of the estate tax. Therefore, for decedents dying after December 31, 2009, there is no estate tax return due by the executor. EGTRRA also makes the GST tax inapplicable for any generation-skipping transfers made after December 31, 2009. . . .

EGTRRA does not, however, repeal the gift tax; therefore, transfers of property after December 31, 2009 may still subject to the gift tax. Donors are still allowed a $1 million exemption, as well as an annual exclusion. EGTRRA does, however, reduce the maximum tax rate for a taxable gift made in 2010 to 35% (from 45% as existed in 2009). In addition, it broadened the application of the gift tax by treating certain transfers in trust as transfers of property by gift. EGTRRA also imposes a new requirement for donors to report the basis of the property given to the donee(s). . . .

EGTRRA also changed the rules for calculating basis of property acquired from a decedent and imposed a new information return filing requirement for executors.

New Filing Requirement for Executors

EGTRRA requires executors to file an information return if the property acquired from the decedent exceeds $1.3 million or if the decedent acquired certain property by gift within three years of death. The information return is used to report the carryover basis of the decedent’s property and the allocation of the basis increase allowed under the new basis rules.

The new information return is due with the decedent’s final income tax return.  Generally, this means that for decedent’s dying in 2010, the due date is April 15, 2011. The IRS has not yet released the new form. Failure to file this information return may result in a penalty of $10,000.

In addition, EGTRRA requires executors to provide to each beneficiary a written statement that lists the information reported on the information return with respect to the property that beneficiary acquired from the decedent. The executor must furnish the beneficiaries with this statement no later than 30 days after the filing of the estate information return. Failure to provide each beneficiary with this statement may result in a penalty of $50 for each failure.

This IRS document continues by discussing various property that is eligible for basis increase. 

[2] FAQs about the New Tax Rules for Executors for 2010 

The IRS provides information about wealth transfer taxes in 2010 in question and answer format.  The IRS, like readers of Future of the Federal Estate Tax, is “monitoring the current state of the estate, gift and GST tax law and proposed changes in Congress”:

What is the IRS doing to prepare for the tax law changes?
We are monitoring the current state of the estate, gift and GST tax law and proposed changes in Congress.   If legislation is enacted regarding the estate, gift and GST taxes, the IRS will act swiftly to assess the impact of such legislation and provide guidance to taxpayers regarding their tax obligations and filing requirements.

We are also preparing the return forms for taxpayers to use in the 2011 filing season.

See Julie Garber, Does a Federal Estate Tax Return Need to Be Filed in 2010?, Julie’s Wills & Estate Planning Blog (July 8, 2010). 

Do you think the repeal of the federal estate tax in 2010 will hurt charities?

Estate tax end cuts into charity funding, United Press International, Feb. 14, 2010:

A decision by Congress to let the estate tax expire has taken an incentive away from America's very rich to include charities in their wills, authorities say. . . .

Giving USA and the Center on Philanthropy at Indiana University report numbers concerning charitable giving for 2009 are not yet available, but gifts to non-profits dropped nationwide 2 percent from $314.1 billion in 2007 to $307.7 billion in 2008.

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Adam Nicholson, Death Tax Repeal will not Harm Charitable Giving, American Family Business Foundation, Jan. 26, 2010:  

Some people speculate that the temporary 2010 estate tax repeal will cause charitable donations to decrease due to the lost estate tax charitable deduction. These claims are often based on anecdotes, if not blind assumptions. The economic data indicates that permanent estate tax repeal may actually increase charitable contributions.

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Ashlea Ebeling, Estate-Tax Lapse Could Hurt Charity, Forbes, Jan. 19, 2010.  The synopsis provides, “New IRS data suggest not all the rich think like Warren Buffet and Bill Gates.”

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Robert Frank, The New Estate-Tax Math: Give to Charity or Your Children?, Wall Street Journal Blogs, Jan. 13, 2010:

Many wealthy folks say . . . that they are driven by the desire to make the world a better place.

But in a call last month in support of retaining the tax, mutual-fund pioneer Jack Bogle professed that tax considerations are a “huge incentive” for him to give money to charity . . .

Bill Gates Sr. [said that the estate tax] “is a gigantic element for philanthropy in this country.”

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Grant Williams, Recent Estate-Tax Change Did Not Make Big Difference to Charities, IRS Finds, The Chronicle of Philanthropy, Jan. 4, 2010:

Gradual increases in the level of the federal estate-tax exemption in several recent years apparently did not cause wealthy people to change the shares of their estates that they left to charity, according to a new report from the Internal Revenue Service.

But the increases in the exemption level appear to have resulted in a “slight downward trend” in the percentage of wealthy people who made charitable bequests, the IRS said. . . .

The IRS concluded: “These facts suggest that, while increases in the estate-tax exemption level may have influenced the propensity of wealthy decedents to make charitable bequests at death, such increases

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The IRS report discussed by the authors above is A Look at Estate Tax Returns Filed for Wealthy Decedents, by Brian G. Raub.  Here is one informative chart:

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Jon M. Bakija and William G. Gale, Effects of Estate Tax Reform, Urban-Brookings Tax Policy Center, July 2003:

We find that estate tax repeal would reduce charitable bequests by between 22 and 37 percent, or between $3.6 billion and $6 billion per year. Previous studies are consistent with this finding, and also imply that repeal would reduce giving during life by a similar magnitude in dollar terms. 

Here is an interesting graph from this study:

 
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Frank’s blog entry concludes with the following question, “How much do you think the estate tax changes will hurt philanthropy?”  I invite your your comments. 

IRS is "taking a wait-and-see approach" with regards to the federal estate tax

In February 5, 2010 article -- IRS Silent So Far On New US Tax Rules For Inherited Wealth -- Martin Vaughan writes, "The U.S. Internal Revenue Service is taking a wait-and-see approach on issuing guidance dealing with taxes on inherited wealth, unsure whether Congress will act in the next several months to change the rules again."

Many advisers to the wealthy are taking a similar approach, but Vaughan reports that some "are looking to IRS for rules on how a new capital gains-tax regime that took effect this year will apply to estates."

The wait-and-see approach that practitioners and the IRS are taking probably stems from a belief that Congress will reinstate the federal estate tax retroactive to January 1, 2010.  I have spoken with a number of practitioners who are almost certain that Congress will take such action.  But there can be little certainty when Congress surprised everyone by failing to act by the end of 2009. 

TaxProf Blog also reported on Vaughan's article: IRS Silent Amidst Estate Tax Chaos (2/7/09).  A humorous comment by a person named Woody asks, "Is that 'dead' silence?" 

Tax gifts for the holidays

If you were thinking of getting a tax gift for your special tax geek, you can read these blog entries for ideas:

• Christmas presents for your special tax geek, Don't Mess With Taxes (12/23/06) (featuring a framed reproduction of the original 1913 From 1040, a tie, and chocolate bars).
• Last minute gift ideas for the tax geek in your life, Don't Mess With Taxes  (12/24/07).
• Christmas Gifts for that Special Tax Person, TaxProf (12/22/09) (writing about a deluxe $85.95 wall plaque with the IRS seal).
• Last-minute gifts for your tax geek, Don't Mess With Taxes (12/22/09) (reviews three sites with tax-themed gifts).
• Christmas Gifts for that Special Tax Person, TaxProf (12/23/09) (featuring an autograph of Mortimer Caplin, IRS Commissioner, which is available on eBay).

For a little humor, read the following blog entry from TaxProf about a certain wrestling figure that was once being sold on eBay: Christmas Gifts for that Special Tax Person (12/23/07). 

This holiday, you might also consider giving to charity.  I find the story in the following blog entry by Professor Caron very moving: The Give Blog: The Perfect Last-Minute Christmas Gift.

(Updated 12/23/09)

IRS releases the fall 2009 issue of the Statistics of Income Bulletin: total number of estate tax returns filed dropped between 2001 and 2007

On November 24, 2009, the Internal Revenue Service announced the release of the fall 2009 issue of the Statistics of Income Bulletin. 

The section titled A Look at Estate Tax Returns Filed for Wealthy Decedents Since 2001, by Brian G. Raub, provides the following information:

Between 2001 and 2007, the total number of estate tax returns filed fell significantly, due primarily to increases in the estate tax exemption enacted as part of the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001.  However, the number of returns filed for wealthy decedents, those with at least $3.5 million in gross estate, increased between the two years, from almost 9,500 to just over 14,200.   Estates of wealthy decedents experienced significant fluctuations in the composition of asset portfolios between 2001 and 2007, based in large part on the performance of the equity and real estate markets.  During this period, the percentage of wealthy decedents who left charitable bequests declined slightly, but the proportion of gross estate bequeathed to charity by those who left charitable bequests did not decline significantly.  Philanthropic organizations, including private foundations, remained the largest beneficiary of charitable bequests made by wealthy decedents throughout this period.

Raub's analysis begins on page 287 of the bulletin.  He provides a number of tables and charts that visually present the information.