Future of the Federal Estate Tax

EXCLUSIVE: insight from a 2010 beneficiary — “a retroactive estate tax would smack of an illegal seizure of my assets”

Recently, a beneficiary of a 2010 estate reached out to alert me to an article from BNA: Brett Ferguson and Heather M. Rothman, Applying Estate Tax Retroactively Increasingly Unlikely, Baucus Says, July 28, 2010.  This heir (who asked that I refer to him as DPD) explained that the BNA article provides comments by Sen. Max Baucus on the prospects for a retroactive estate tax.  

In his correspondence, DPD explained that the uncertainty over the federal estate tax is causing his family a lot of stress.  DPD also shared a letter that he sent to prominent people, including Senators Dodd [D-CT] and Lieberman [I-CT]. 

[1] DPD’s words capture the chaos that Congress has imposed on some people.  In addition to dealing with the loss of a close and loved family member, DPD is having to cope with the uncertainty caused by Congress’ inaction:

So much []time has gone by since he passed away. The estate tax issue has made it difficult to move on with life. Since he passed away, my wife quit her job, I have changed careers, we sold our house and bought a new house, and my wife is now four months pregnant with our second child. We have made many decisions based on assets we inherited a long time ago in January.

Had Congress acted early in the year, I would accept it as an effort to correct a mistake. Congress has had ample time to address this issue. As the year comes to an end, a retroactive estate tax would smack of an illegal seizure of my assets. This is not only concerning from a financial standpoint, but as a citizen: a retroactive estate tax nine months after repeal should scare and offend every American because it sets a precedent for other tax issues.

[2] DPD also shared the following letter that he wrote to prominent people.  DPD explains that “[i]t quotes important tax writing elected officials and presents a factual evolution of the estate tax debate this year”: 

September 1, 2010

Senator Christopher Dodd

30 Lewis St Suite 101

Hartford, CT 06103

Dear Senator Dodd:

In an opinion piece in yesterday’s Wall Street Journal authored by Robert Rubin and Julian Robertson, they attempted to make the case for a retroactive estate tax with flawed and incomplete information. This missing information severely undermines their argument.

In that article, they stated that, “there has been notice—through the president's budget and statements by public officials—that a (retroactive estate) tax would be enacted earlier this year that would apply to the whole of this year.”

In January and February of this year, Max Baucus, Chairman of the Senate Finance Committee, and Treasury Secretary Timothy Geithner expressed a desire to impose an estate tax retroactive to the start of 2010. But as early as February, Charlie Rangel, Chairman of the tax writing House Ways and Means Committee stated, "I don't like retroactivity, but you never can tell."

When Sander Levin replaced Charlie Rangel as Chairman of the House Ways and Means Committee in March, he indicated that if a retroactive estate tax were put in place, he favored giving taxpayers the choice of complying with current law- no estate tax but a capital gains tax- or whatever Congress eventually passed. According to a March 16th Bloomberg article, “One possibility being considered, (Levin) said, would let heirs choose to pay the capital gains tax that replaced the estate levy if that is more beneficial. “We have to write it so we don’t disrupt estate planning in this country.”

After the Kyle Lincoln estate tax proposal failed to reach the Senate floor in May, Max Baucus signaled that he was moving away from the idea of pure retroactive reinstatement. Although Baucus was perhaps the strongest and most influential proponent of retroactivity in the early part of the year, on July 27th, a BNA Tax and Accounting article quoted him as saying, “Practically speaking, the later that we take up and pass the estate tax law or provision, the more difficult it is to make it retroactive. However, it's possible there could be an election for the executor which would, in effect, make that question moot.”

At the IRS Tax Forum in New York on August 12th, Patrick Leahy, an attorney with the estate and gift tax division in Manhattan, told an audience of tax prepares not to file a Form 706 for 2010 estates, or the estate tax return. According to Web CPA, Leahy said, “If you file a 706 to the IRS Service Center, we will rapidly return it to you because we don’t have a place to put them.”

As the estate tax debate has evolved this year, the majority has concluded that either nothing will be done by Congress, or at the very least, there would be an option for estates in terms of compliance with existing and future law. This was made clear in a July 30th straw poll of estate tax experts in Julie Garber’s Wills and Estate Planning Blog. Only 11% of respondents believed there would be a retroactive estate tax.

If the keystone in the retroactive estate tax argument rests between what public officials have communicated to the public and the expectations of the public, then Congress should follow through with what it has indicated throughout the year: give 2010 estates a choice in estate tax compliance.

Best regards,

DPD

For more information (in chronological order):

• Hani Sarji, Rep. Rangel and Sen. Baucus on retroactively imposing the federal estate tax, Future of the Federal Estate Tax, Jan. 15, 2010. 
• Hani Sarji, Rep. Levin states retroactive fix for federal estate tax is coming, Future of the Federal Estate Tax, March 16, 2010.
• Robert Rubin And Julian Robertson, Bring Back the Estate Tax Now, The Wall Street Journal, Sept. 1, 2010.
• Brett Ferguson and Heather M. Rothman, Applying Estate Tax Retroactively Increasingly Unlikely, Baucus Says, BNA, July 28, 2010.
• Hani Sarji, Round-up of comments on the WSJ op-ed by Rubin and Robertson, Future of the Federal Estate Tax, Sept. 29, 2010.  

In this radio interview, Massachusetts attorney Nicholas Keramaris talks about the estate tax and estate planning

Part 1: introduction to Nicholas Keramaris and Keramaris & Keramaris, estate tax mess.

Part 2: the need to start planning right away, retroactivity, choice, why estate planning is not just about estate taxes.

Martin Vaughan (WSJ): "Estate Tax Choice May Be In Works For 2010 -Treasury Official"

On September 13, 2010, the Wall Street Journal (Dow Jones Newswires) published Estate Tax Choice May Be In Works For 2010 -Treasury Official, by Martin Vaughan:

The estates of those who died this year might be allowed to be taxed as if they died in 2009, in order to resolve a problem created by the repeal of the estate tax, a Treasury Department official said. . . . 

"We need to figure out what to do with this gap period, and one possibility would be to look to filling that gap with an election to apply 2009 law," Mundaca said.

Vaughan reviews other options that are available:

Another option would be to impose estate tax rules retroactively for 2010, but that would be opposed by congressional Republicans and likely some Democrats. A third option would be to leave 2010 law the way it is and pass estate tax changes only prospectively.

See also: Kim Dixon (Reuters): "Obama mulls estate tax choice", Future of the Federal Estate Tax.

(Hat tip: Michael Hepner, a benefits professional; and DPD, a 2010 beneficiary.  You will learn more about DPD in a forthcoming post.)

Robert W. Wood (Forbes.com) bets that a retroactive estate tax would cause litigation

On September 8, 2010, Forbes.com published Making Tax Decisions In Limbo - Forbes.com, by Robert W. Wood:

Another big change is estate tax, although short of planning to die in 2010, there's not much you can do to take advantage of the current hiatus. There's no estate tax in 2010, and we don't yet know exactly how 2011 deaths will be taxed. People who had the tax clairvoyance to die in 2010 may skate by without any federal estate tax, although a retroactive estate tax to scoop in 2010 estates is still quite possible.

If Congress tries to retroactively impose an estate tax on 2010 deaths, I'm betting there will be litigation raising constitutional issues. Texas oilman Dan Duncan and California real estate mogul Walter Shorenstein are among the billionaires who have died in 2010, so there are billions of tax dollars at stake. It seems unlikely that taxes of this magnitude will be paid without a fight, and such a fight may impact smaller estates too. If your family experienced a 2010 death, you should watch this area closely. (For more on the complications faced by such families, click here.)

Julie Garber (Julie's Wills & Estate Planning Blog): "Estate Tax Update - What You Need to Know About the Modified Carryover Basis Rules"

On September 13, 2010, Julie Garber posted Estate Tax Update - What You Need to Know About the Modified Carryover Basis Rules on Julie's Wills & Estate Planning Blog.  She writes,

As the summer of 2010 fades into the sunset, the likelihood of the federal estate tax coming back and being applied retroactively to January 1 is becoming more and more unlikely. With this realization comes a new problem - how to deal with what has taken place of the federal estate tax for the 2010 tax year - the modified carryover basis rules.

Garber then summarizes a recent Forbes.com article by Deborah L. Jacobs, Seven Steps for 2010 Heirs. 

Marshall Loeb (MarketWatch): "Estate-tax uncertainty will drag for a while"

On September 13, 2010, MarketWatch published Estate-tax uncertainty will drag for a while, by Marshall Loeb:

A $1 million exemption ($2 million for married couples) would hit a lot of middle-income taxpayers, notably farmers and small-business owners. Your taxable estate could fairly quickly exceed $1 million if you own a nice home or simply live in a place where property values are high, have an IRA or 401(k) retirement account, and some other savings.

Hoping for some sanity in Washington, a long list of legislators has put forward compromises for an estate-tax bill, many of which will be passionately debated in Congress in the weeks ahead. Meanwhile, President Obama made it clear this week that he opposed the Bush-era tax cuts for wealthy Americans. . . .

A raucous debate is coming

What seems likely is that in the weeks ahead there will be increasingly fervid debate over a number of compromise proposals supported by various interests. . . .

Whether a compromise can be reached is yet to be seen. And even then, it's unclear whether a new estate tax would be retroactive.

The chaos in Washington is like "a family get-together where everyone is talking at once and no one is listening," said Deborah L. Jacobs, author of "Estate Planning Smarts."

She doesn't expect any resolution to the estate-tax mess this year and predicts that the uncertainty will extend to 2011.

John Kent Kidwell: 2010 might not be a good year to die

On September 8, 2010, John Kent Kidwell (attorney, Virginia) posted Lapse or Revival of the Estate Tax? It Makes a Huge Difference! on Leading By Example: Revolutionizing Law and Politics blog.  Kidwell makes the following interesting comments:

From a purely financial standpoint, does this mean that 2010 is a good year to die?  I would argue to the contrary because, concomitant with the expiration of the estate tax, the capital gains tax on inherited property that is sold has been raised to 15%.  Beneficiaries of inherited property will no longer enjoy a stepped-up basis when selling property inherited from their loved one’s estates. . . .

So, then, what is Congress set to do by way of tackling this situation?  The conventional wisdom, it seems, is Congress will re-institute the estate tax at an amount somewhere around the $3-4million mark, and make the law retroactive to January 1st of this year.  Until this is done, however, it is truly a guessing game.

Cheryl Costa informs about some of the 2010 estate tax rules: modified carryover basis, potential for cap gains tax

Cheryl Coast, No estate tax due in 2010 but beware of cap gains (Boston Globe, 9/7/10):

As you probably know, there is no estate tax due for people who die in 2010. All year, we have been expecting the estate tax laws to be updated (and possibly imposed retroactively to January 1, 2010) but that has not happened. Further, it now appears that there will be no changes for 2010 and that people who die this year will not owe any estate taxes (or more accurately, their estate won't owe any estate taxes.)

However, that doesn't mean that large estates get a "free pass" this year. Things might even be more complicated. That is because a "carryover basis" rule is in effect this year.

Jim Cramer thinks that the estate tax should be retroactively reinstated

[1] In Cramer's Mad Money - 8 Ways to Create a Free Stimulus (Seeking Alpha, 9/7/10), Miriam Metzinger recapped Jim Cramer's comments regarding the federal estate tax:

How can we get the economy moving again? Cramer outlined 8 steps to make this happen.

1. Estate Tax Retroactively reinstated; "Not one thinking person in this country can understand why the President and Congress have not tackled this issue," Cramer said. "This is the most painless form of tax, goes right with the surety of the other constant, death, and allows for a huge pick-up in revenue, a reduction in the deficit, and no damage done to the economy."

[2] Is the solution to the estate tax really as obvious as Cramer thinks it is?  One reason why "the President and Congress have not tackled this issue" is because there are good arguments for and against the estate tax.

Some agree with Cramer. For example, Center on Budget and Policy Priorities, The Estate Tax: Myths and Realities (2/23/09):

Myth 1: Weakening the estate tax wouldn't significantly worsen the deficit because the tax doesn't raise much revenue.

Reality: Repealing the estate tax, or weakening it well beyond its 2009 parameters, would add trillions of dollars to future deficits and be fiscally irresponsible.

Others disagree with Cramer. For example, Antony Davies & Pavel Yakolev, Myths and Realities Surrounding the Estate Tax (AFBI, 12/9/09):

Proponents of estate, inheritance, and gift (EIG) taxes admit that the taxes generate little revenue, but claim that the taxes provide a social benefit by preventing the accumulation of wealth in the hands of generational dynasties. Evidence presented here suggests that EIG taxes actually cost states more in lost revenue than they generate, that they negatively impact smaller firms disproportionately versus larger firms, and that they promote the concentration of wealth by preventing small businesses from being passed on to heirs.

[3] One article on the logical fallacy of one-sidedness (i.e., card stacking, ignoring the counterevidence, one-sided assessment, slanting, suppressing evidence) opens with a fitting quotation from John Stuart Mill:

He who knows only his own side of the case, knows little of that. His reasons may be good, and no one may have been able to refute them. But if he is equally unable to refute the reasons on the opposite side; if he does not so much as know what they are, he has no ground for preferring either opinion.

Forbes.com article, by Deborah L. Jacobs, provides seven steps for coping with carryover basis in 2010

On August 23, 2010, Forbes.com published Seven Steps For 2010 Heirs, by Deborah L. Jacobs.  In this timely article, Jacobs summarizes the carryover basis rules that currently apply in 2010 for inherited assets.  Jacobs provides and discusses seven steps that inheritors and their advisers need to take in 2010.  The bullets underneath each step are highlights from Jacobs’s article, which should be read in its entirety:

1. Have assets appraised.
   • carryover basis, income tax in 2010
   • Jacobs provides a helpful example
2. Locate purchase records.
   • records prove basis
   • consensus regarding estimating cost basis
   • complications with real estate
3. Delay selling appreciated assets.
   • with step-up in basis, there is no income tax when executor sells assets; with carryover basis, there could be an income tax
   • one interesting interpretation of section 901(b) of EGTRRA
   • conflicting views by two practitioners on whether executors should sell assets in 2010
4. Postpone distributions.
   • retroactive estate tax or carryover basis?
   • the need to set aside money to pay for an estate tax or a capital gains tax
5. Extend paperwork deadlines.
   • reporting carryover basis
   • IRS has not created a form
6. Apply the basis allowance fairly.
   • problems can arise “when an executor is also a beneficiary”
   • analogy to “when all assets were valued as of the date of death”
7. Guard against an executor's added risks.
   • 2010 “seems to leave an executor extra vulnerable”
   • no guidance, no forms
   • tips for executors

Like this article, Jacobs’s book on estate planning is very useful.  Widely praised for its plain English approach, Estate Planning Smarts: A Practical, User-Friendly, Action-Oriented Guide has another virtue while the estate tax is in flux: Jacobs issues updates that can be downloaded from the book's Web site www.estateplanningsmarts.com, and tweets at http://twitter.com/djworking.