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