Future of the Federal Estate Tax

Laura Saunders (WSJ): it is unclear whether estate tax fix (if any) will be part of income tax compromise

On November 6, 2010, the Wall Street Journal published Four Burning Tax Issues, by Laura Saunders:

Estate Tax

Status: Chaotic. . . .

This is the most difficult outcome to predict, [Clint Stretch of Deloitte Tax] says. It is unclear what a fix would be, if any, and whether it would happen as part of an income-tax compromise. There is sentiment for providing estates of people who died this year a retroactive choice of which tax rules to use.

Martin Vaughan: business groups that oppose estate tax are willing to back short-term compromise

On November 5, 2010, NASDAQ.com published Business Groups Back Quick Compromise On Estate Tax, by Martin Vaughan: 

Business groups that oppose the federal estate tax say they are willing to back a short-term compromise with congressional Democrats, in order to avoid the tax returning to its highest level in 10 years.

However, Republicans in Congress aren't ready to back down from their demands for an estate tax rate of 35%, setting up one of the more unpredictable tax battles in Congress's lame-duck session.

A political stalemate would be the worst possible outcome for the business lobby. . . .

Even mainstream Democrats want to prevent the higher rates from taking effect in 2011. They have proposed a permanent rate of 45%, with the first $3.5 million of estate wealth exempt--the parameters that were in effect in 2009.

Martin Vaughan: "the new political landscape does little to dispel the uncertainty that has clouded . . . the estate tax"

On November 4, 2010, NASDAQ.com published Obama Tax Agenda Likely Sidelined By GOP House Take-Over by Martin Vaughan (Dow Jones Newswires):

The Republican takeover of the U.S. House will sideline much of President Barack Obama's tax agenda, including proposals to repeal tax breaks for multinational firms and oil companies. . . .

But the new political landscape does little to dispel the uncertainty that has clouded the future of individual tax rates, the estate tax and popular business tax breaks like the research tax credit.

Republicans are vowing to resist any and all tax increases, casting doubt on whether there is room for agreement on a broader tax-and-spending deal with Obama.

Rep. Cynthia Lummis: some are planning to die in 2010 to avoid estate tax in 2011

A number of articles are publishing comments by Rep. Cynthia Lummis [R-WY] regarding a perverse incentive in 2010 -- Estate tax rise has some planning death (Associated Press, 10/30/2010):

U.S. Rep. Cynthia Lummis says some of her Wyoming constituents are so worried about the reinstatement of federal estate taxes that they plan to discontinue dialysis and other life-extending medical treatments so they can die before Dec. 31.

Lummis, a Republican who holds her state's lone seat in the House, declined to name any of the people who have made the comments.

But she said many ranchers and farmers in the state would rather pass along their businesses — "their life's work" — to their children and grandchildren than see the federal government take a large chunk. . . .

Lummis said the children of some people choosing death over taxes told her of their parents' decision. She wouldn't identify them and said it would be their decision to come forward.

Deborah L. Jacobs explains why 2010 is a good year to leave the children the house

On October 20, 2010, the New York Times published, Leave the Children the House, Without a Hefty Tax Bill, by Deborah L. Jacobs.

Jacobs explains that 2010 is a good year to give the house to children because the gift tax rate is at 35% in 2010 and it is scheduled to be at 55% in 2011.

Jacobs provides the following strategies:

• Give partial interests.
• Use a grantor trust.
• Create a QPRT.
• Create a legal entity.

Jacobs explains that there are drawbacks:

Perhaps the biggest hurdle, though, is the awkwardness of having business relationships with family members . . .    

If you want to keep living in the house, you must pay fair-market rent to the family members or an entity (like a trust) that becomes the owner. Awkward though this might be, it's a smart estate tax move, because the rent then is a way of giving money to your family without having to pay gift tax. 

Jacobs is the author of Estate Planning Smarts: A Practical, User-Friendly, Action-Oriented Guide.  Jacobs keeps readers current between editions of her book by issuing updates that can be downloaded from her book's website http://www.estateplanningsmarts.com/ and by tweeting at http://twitter.com/djworking.

Anne Tergesen (WSJ): gift tax and GST tax opportunities in 2010

On October 30, 2010, the Wall Street Journal published Last Chance to Foil a Gift Tax, by Anne Tergesen.  This article is excellent, but its title does not reflect the great insight that the article provides on the GST tax. 

For the right people, there are excellent estate planning opportunities in 2010:

When the GST tax returns on Jan. 1, the Internal Revenue Service will allow each grandparent to shield a total of about $1.34 million, according to JPMorgan Private Bank. Advisers are urging families with a desire to give more to take action by Dec. 31. "We're having a lot of conversations about the fact that there's no GST tax this year," says Elizabeth Schurig, a partner at Schurig Jetel Beckett Tackett in Austin, Texas.

Ms. Schurig is urging one client to give each of her 12 grandchildren up to $2 million by year end. This, she says, would "reduce the grandparent's estate, and it has no GST tax implications"—and any future appreciation on the assets would occur outside the estate.

The move would require the woman to write a big check to the IRS, of course. The reason: A gift of that magnitude would trigger the gift tax, which is currently 35% but is set to rise to 55% in 2011.

Amity Shlaes (Bloomberg): "Democrats' Estate Tax Plan Trips Next Secretariat"

On October 27, 2010, Bloomberg published Democrats’ Estate Tax Plan Trips Next Secretariat, an opinion by Amity Shlaes:

The estate tax is one topic getting lost in the dust of the midterm races. That’s a pity. This tax, now quiescent, is set to roar back like a stallion in 2011 if lawmakers don’t rein it in with new legislation.

The destruction caused by the estate tax can be hard to capture. This is partly because the family business dynamic, so affected by the tax, is also hard to describe. Nonetheless, if left unchecked, this levy can trip up not only the workings of a family enterprise but also the general economy. An entertaining reminder of this fact is a film in theaters this midterm autumn. . . .

The 1970s was the bad old estate tax days,” Paul Caron, a tax expert at the University of Cincinnati College of Law, said in an e-mail. “The exemption was only $60,000 ($334,000 in today’s dollars) with a 77 percent top rate. Just as the day’s 70 percent top income tax rate spurred all sorts of aggressive tax sheltering activity, the draconian estate tax rates encouraged the wealthy to spend considerable time and money engaging in various strategies to reduce the estate tax bite.”

The fact that one of those tax-escape strategies might have been the purchase of gentlemen farms like the Chenerys’ doesn’t undermine the larger point: navigating tax obstacles stole precious time from more worthy endeavors.

Jeff Schnepper (MSN Money) thinks Congress will pass estate tax compromise

On October 28, 2010, MSN Money published Biggest-ever tax hikes just ahead?, by Jeff Schnepper.  Schnepper gives his estate tax prediction:

After the November election, there should be a compromise. I expect the maximum rate to phase downward from 45% to 35%. I also predict an exclusion of $3.5 million for 2010 and 2011, phasing up to $5 million with a return to full step-up in basis. I suspect the law to be retroactive for 2010, but the estates of those dying before passage could follow the current zero-estate-tax rules.

Artie Green (Los Altos Town Crier): "2010: Not the year to die"

On October 26, 2010, the Los Altos Town Crier published 2010: Not the year to die, by Artie Green.  Green believes that 2010 is not a good year to die because in 2010 carryover basis rules replaced the typical step-up in basis rules that apply when someone dies:

The year 2010 is not the time to die. No, I’m not talking about you – I’m talking about your rich Uncle John. . . .

“Wow!” you might be thinking. “That sounds great! If there’s no more estate tax, that leaves more money for me to inherit from his estate, doesn’t it?”

Well, kind of. . . .

there’s a little known and much bigger problem with elimination of the estate tax in 2010 that will affect a larger proportion of taxpayers, and that’s the consequent elimination of the step-up in basis for inherited property.

Fox Business video: 2010 is a good time to go (and a good time to get sick)

On October 21, 2010, FoxBusinessNetwork posted 2010: A Good Time to Go on YouTube.  The advice might sound callous, but Neil Cavuto gives reasons for it.