Estate Tax

Tuesday, July 06, 2010

GRATs

Both the House and the Senate are considering changes to the taxation of GRATs that would greatly reduce the estate and gift tax savings that GRATs generate. The changes would prohibit the establishment of short-term GRATs by requiring a minimum term of 10 years.  In addition, it would eliminate zeroed-out GRATs by requiring that there be a minimum amount in the GRAT at the end of its term.  Therefore, if any of your clients are considering establishing a GRAT or you are recommending a GRAT to your clients the GRAT should be established now, before any change is effective.  If you or your clients require any assistance please call our office and speak to Neil or Bob.

Tuesday, March 16, 2010

QTIP election for NYS

With the current no-federal estate tax situation, a question arose as to whether a QTIP election could be made for the NYS estate tax.  New York State law did not allow a separate QTIP election.  A QTIP election was allowed for NYS estate tax purposes if the election was made on the federal estate tax return.  Where there is no federal estate tax, or no estate tax return was required to be filed a separate NYS QTIP election could not be made. 

New York State Department of Taxation and Finance has now rectified this problem with the issuance of TSB-M-10(1)M (issued on March 16, 2010).  A separate NYS QTIP election can be made by attaching a pro-forma federal estate tax return to the NYS estate tax return. 

The TSB states that for the year 2010, if there is no federal estate tax, the federal form to be used for the pro-forma purposes is the Form 706 (Rev. 9-2009) used for decedents dying in 2009.

Tuesday, February 16, 2010

Pay-As-You-Go (PAYGO)

On February 12, President  Obama signed into law the Statutory Pay-As-You-Go Act of 2010.  The bill requires that any new non-emergency legislation affecting tax revenue not increase the federal deficit.  In other words, any tax reduction provisions must be paid for by other tax increases.

It is interesting to note that the following tax provisions have been exempted from PAYGO:

Extension of the 2009 Estate and Gift Tax provisions;

An Alternative Minimum Tax patch;

A permanent extension of the Section 179 increases; and

Making permanent any middle class tax cuts (i.e. reduced capital gains and dividend rates, educational incentives, elimination of limits on personal and dependency exemptions and itemized deductions, and tax rate reductions).

Monday, February 01, 2010

Heckerling Estate Planning Conference

Neil and I just returned from Orlando Florida where we spent the last week listening to the "experts" regarding the current status of the estate tax and what Congress is planning to do.  As you know, from my previous blog, Congress did not act prior to December 31, 2009 and therefore we presently have no estate tax for people dying in 2010.  Unfortunately, the experts pointed out the problems with regard to the estate tax suspension for one year but were not able to add any insight as to what Congress may do and when they may do it.

However, they all seem to suggest that if Congress does not act within the next month no legislation will take place until after the mid-term election in November. 

The next issue that they discussed was the constitutionality of a retroactive reinstatement of the estate tax law, for people dying in 2010.  The general consensus is that since this is not a "new tax" it would be constitutional.  Although they all believe that if the tax is made retroactive to January 1, 2010, there would be a number of law suits brought to challenge it.

Married clients, who had standard credit shelter wills, face special problems if they die in 2010 without the tax being retroactively reinstated.  This results from the standard language that establishes the credit shelter trust which is based upon the maximum amount to create the minimum estate tax.  Since there is no estate tax, the maximum amount would be the entire estate of the first of the spouses to die.  This could create undisireable results for the survivor and their children.  Therefore, it is important that elderly and infirmed married couples review their wills with competant counsel to avoid problems if one of them passes in 2010 and there is no estate tax.

Finally, the suspension of the estate tax has brought with it "carry-over" basis, which itself creates issues.  For example, it is unclear as to whether carry-over basis only applies to assets sold in 2010 of an individual that died in 2010.  The law provides that the estate tax and "fair market value" basis returns in 2011 as if the 2010 provisions "never applied."  Does this mean that if an individual died in 2010, with no estate tax, and assets are sold in 2011 and later years the basis for those assets are the fair market value on the date of death or alternate valuation date?

There are many issues outstanding .  This may be the first time that the phrase "it is what it is" has no meaning at all.

As always we are here to help you and your clients muddle through this maze.

Wednesday, December 30, 2009

2010 Where do we go from here?

Here we are on December 30, 2009 and there has been no change to the upcoming one-year repeal of the Federal Estate Tax.  If anyone had told me, at any time within the past ten years, that I would be discussing the repeal at this time I would have told them they were crazy.  But it appears that the truly crazy people are our elected officials in Washington.

Let me give you something to think about and we would like to hear what you have to say in this matter.  There are two possible senarios that we must contemplate:

First- Congress will do nothing in 2010 to the estate tax.  If this happens there will be a one year moratorium and many plugs will be pulled.  For people dying in 2010 there will be no estate tax, the beneficiaries (with limited exceptions) will inherit assets with a carry-over basis (instead of a stepped-up basis) and gifts over and above the annual exemptions and life-time exemption will be taxed at a rate of 35%.  On January 1, 2011 the estate and gift taxes will revert to the rules that were in place ten years ago (Exemption of $1,000,000 and maximum tax rate of 55%).

Second- During 2010 Congress will enact a "permanent estate and gift tax law."  Based upon bills introduced into the House and the Senate, in 2009, the exemption may stay at the $3.5 million level, the tax rate will be at most 45%, possibly lower, and stepped up basis will be reinstated.

Generally, the government does not like to pass tax legislation retroactively (unless it benefits taxpayers).  Ponder this: A taxpayer dies early in 2010.  Congress enacts an estate tax subsequent to the date of the taxpayer's death.  What is going to happen?

Will the estate tax be applied retroactively?  Will there be some blending of tax rates to soften the blow to the estate?  Can you have two taxpayers who died in 2010, both with identical estate values, where one dies before the enactment and one dies after, where their estates are taxed differently?

Welcome to the State of Confusion.  Your comments would be welcome.

Bob Katz