Matthew Curtiss, Esq

How to Protect Your Family From Estate Tax Uncertainty

An Illinois woman inherited not quite $100 million this year. Estate taxes could consume 53 percent, 45 percent, 16 percent or none of it, depending on whether the federal and/or Illinois estate taxes -- which both lapsed on Jan. 1, 2010 -- are reinstated retroactively. "It's wacky to have so many scenarios and not know what the tax is," complains Richard A. Lang, a Chicago partner of McDermott, Will & Emery representing the estate.

You're not crying for the heiress or her lawyer? Then consider another Lang client, a widow trying to divide her late husband's modest estate with the children from his first marriage without incurring ill feelings or big lawyers' bills. The husband's will was tied to the defunct federal estate tax. Now, by one legal reading the widow gets everything outright. By another, all the assets go into a trust that ultimately goes to the children, with the widow having access to the trust's earnings (and, if need be, principal) while she's alive. "This is going to be worked out," Lang vows.

via abcnews.go.com

For us in Connecticut, we have the added fun of working with the probate courts to facilitate the 2011 consolidation.   Smaller courts which will be closing shop early next year do not want estates left open, if possible, before handing cases off to the new regional courts.  Executors for estates on the edge of federal taxation  likely being advised to wait until Congress finally acts (or not acts) rather than distribute out assets to beneficiaries (running the risk of incurring tax liability and having no assets on hand to cover the bill).

What Will Happen to the Federal Estate Tax? - WSJ.com

"I can't believe Congress would let this happen," says Nadine Gordon Lee, president of Prosper Advisors, a wealth-management firm.

"The most likely option for a lame-duck session compromise seems to be restoration of the 2009 rules," says Tim Hanford, a consultant in Bethesda, Md., and a former tax staffer on the House Ways and Means Committee. "However, many members of Congress would like to provide even more estate-tax relief."

Much of the speculation focuses on setting the basic estate-tax exemption level somewhere between $3.5 million and $5 million and cutting the top rate to somewhere between 35% and 45%.

via online.wsj.com

my prediction: $5M exemption and 35% top rate

Retroactive estate tax for 2010 unlikely, economist Young says - Investment News

The longer that Congress drags out setting an estate tax rate and exemption level, the less likely it is to impose a retroactive tax for 2010, according to an economist with a leading agricultural organization.

The estate tax expired this year but will snap back to 55% with a $1 million exemption in January unless Congress sets different parameters. The estate tax and several tax cuts implemented during the Bush administration have languished this year, with Congress expected to take them up next month, after its summer recess.

Many investment advisers will be watching Capitol Hill warily this fall, worried not only about where the estate tax will be set but also what might be done about the lack of an estate tax in 2010.

Because Congress hasn't acted so far, it is unlikely that it will implement a retroactive tax for 2010, said Robert Young, chief economist at the American Farm Bureau Federation.

“The longer it goes on, the tougher it will be for them to come back and extract those taxes,” he said at a meeting last Monday with media at the American Petroleum Institute in Washington. “I'm not hearing a big political push to do it.”

via www.investmentnews.com

file under: you could have knocked me over with a feather.

WebCPA - IRS Warns: Don’t Send Us Estate Tax Returns (Until Further Notice)

As the estate tax remains in temporary limbo this year until Congress decides what to do, the IRS at least is sending a clear message. It doesn’t want an estate tax return for those who died this year.

Speaking at the IRS Tax Forum in New York on Thursday, Patrick Leahy, an attorney with the IRS’s estate and gift tax division in Manhattan, told an audience of tax preparers they don’t have to file the Form 706, the U.S. Estate (and Generation-Skipping Transfer) Tax Return.

“If you file a 706 to the IRS Service Center,” he warned, “we will rapidly return it to you because we don’t have a place to put them.”

Also forget about getting a clearance letter or discharge letter from the IRS because everybody will fail to meet the non-existent threshold for a discharge this year. However, if you have a gift tax situation, you still have to file a Form 709. For gifts made in 2010, there is an exemption of $1 million and a maximum rate of 35 percent.

Of course, all of that might change if Congress manages to pass an estate tax fix and makes it retroactive for this year. But that appears increasingly unlikely as the year goes on, and disagreement over the various tax extenders and Bush tax cuts remains unresolved.

via www.webcpa.com

Makes sense since there's no tax this year, but the problem seems to be no clearly defined way to set the cost basis on a decedent's property. This year, the executor of an estate can "assign" up to $1.3M of basis to the decedent's date of death. I've seen varying methods to do this, but no official form.

More wealthy migrate south to avoid tax hikes - Investment News

For years, wealthy retirees from high-tax states in the Northeast and Midwest have been streaming to sunny, low-tax Florida. That stream is now turning into a flood.

“We haven't had a situation like this in quite a few years,” said Greg Rosica, a tax partner at Ernst & Young LLP.

“We have this impending tax increase, and people are trying to looking for ways to hide from that, but they're not seeing many from the federal perspective. One of the ways they're looking to do it is changing their state income tax rate,” Mr. Rosica said.

“This move to no-tax states is absolutely big business,” said Thomas Handler, a partner at the law firm Handler Thayer LLP. “People are doing it all day long, and it's ramping up.”

In addition to Florida, the states that don't tax income are Alaska, Nevada, South Dakota, Texas, Washington and Wyoming. New Hampshire and Tennessee tax only dividend and interest income.

via www.investmentnews.com

Connecticut has the double-whammy: an estate tax combined with an income tax. While some statistics show that the combination of the two don't promote southern migration, the perception might just be driving the reality. The Connecticut legislature did a big favor to itself and to its citizens by removing the "cliff" from its estate tax scheme.

If the southern migration is a true problem, none of this will be solved anytime soon as states have become reliant on income and estate taxes to fund their business.

Congress and Estate-Tax Revisions - WSJ.com

Q: Who in Congress are the key leadership players on revising the estate tax? Is this a separate issue or part of overall tax reform? Is it possible they will deal with this prior to their August recess?

—L.R., Santa Fe, N.M.

A: Among the major players are Senate Majority Leader Harry Reid, a Nevada Democrat, and Sen. Max Baucus (D., Mont.), who heads the Senate Finance Committee, which oversees tax legislation.

Others include Sen. Charles Grassley of Iowa, the ranking Republican on the Senate Finance Committee; Sen. Jon Kyl (R., Ariz.); and Sen. Blanche Lincoln (D., Ark.)

The main focus is on the Senate since the House already has approved estate-tax legislation. Among the key players in the House: Speaker Nancy Pelosi, a Democrat from California, and Democratic Rep. Sandy Levin of Michigan, chairman of the powerful Ways and Means Committee. Rep. Dave Camp of Michigan is the ranking Republican on the Ways and Means Committee.

On your question about timing: Nobody knows when Congress will act, or whether this tax will be dealt with as part of some wide-ranging legislation. It's possible that the Senate might reach agreement in coming weeks. But lawmakers might wait to tackle the issue until after the November elections.

via online.wsj.com

I good primer on who is sitting on their hands and who is not at this juncture.

Tax Man Loses on Timing of Steinbrenner's Death - WSJ.com

The timing of George Steinbrenner's death may have saved his heirs from a hefty tax bill.

The Yankees owner accumulated a net worth of about $1.15 billion, according to Forbes magazine—much of that stemming from the YES television network. Mr. Steinbrenner acquired the Yankees in 1973 for $10 million.

Because Mr. Steinbrenner died in a year when there is no federal estate tax, he potentially saved his heirs a 55% levy on his assets—amounting to a tax bill of about $600 million.

The 55% tax takes effect on Jan. 1, 2011.

via online.wsj.com

Of course, the IRS stands to get some pretty hefty tax revenues on the capital gains on The Boss' assets. While there is no estate tax in 2010, there is also no step up in basis at death either. That means, the heirs would receive the cost basis in the inherited assets at the time the asset was purchased. In the Yankees case, Mr. Steinbrenner was part of a group that purchased the team in 1973 for $10M. Seeing as how the team and its TV networks are likely in the billions of dollars; the IRS won't shed too many tears on this one.

Proposed Estate Tax: Pay Now, Die Later - The Wealth Report - WSJ

Some new proposals kicking around Congress make for even weirder possibilities. According to Tax Notes, Sen. Jon Kyl (R., Ariz.) is reportedly mulling a kind of prepaid estate tax.

It is unclear exactly how the plan would work, but one scenario would allow people to create “prepayment trusts.” They could put assets into the trust for five years and pay a 35% capital-gains tax on the gains of the assets. When the taxpayer dies, the assets would pass to heirs without any estate tax.

As Tax VOX points out, “The option provides two big tax breaks: there’s no tax on the owner’s basis of assets transferred to the trust and any subsequent profits are taxed at the preferential capital gains tax rates.”

The effect for the government is to create much-needed revenue now, but a big drop-off in collections later, which could get around Congress’s pay-as-you go rules.

via blogs.wsj.com

Seems plenty reasonable in light of the inaction and do-nothing currently going on.

Plus, it might incentivize wealthy families into pre-paying now rather than waiting for some future impact which may or may not happen down the line. (would a wealthy 85 year old widower pre-pay in 2008 knowing the estate tax exemption was going to $1M in 2011? maybe....)

What say you?

US Senate Effort To Reduce Estate Tax Hits Turbulence

WASHINGTON -(Dow Jones)- Senators seeking a bipartisan deal to cut taxes on wealthy estates said negotiations have stalled, as several Senate Democrats strongly condemned the efforts Tuesday.

President Barack Obama has proposed exempting estates worth less than $3.5 million, or $7 million for couples, and taxing wealth above that amount at 45%.

Senators that want to reduce estate tax rates even further have in the past two weeks closed in on a compromise that would not add any more to the deficit, at least in the short-term, than Obama's plan. The plan would start at Obama's proposed levels in 2011, but gradually phase down to a 35% rate and a $5 million exemption level.

But Tuesday they said that a proposed compromise is in limbo. "Nothing is clear about how the estate tax will be considered," said Sen. Jon Kyl (R., Ariz.), the lead Republican in the negotiations. "Last week I believed there was an agreement on what the details were going to be. That may not be the case now."

"There's no agreement on estate tax, neither on substance nor on process. None whatsoever," said Senate Finance Committee Chairman Max Baucus (D., Mont.), who is one of two Democrats involved in the talks, the other being Sen. Blanche Lincoln (D., Ark

via www.nasdaq.com

Dear Senators:

I understand that this is an election year, but can you please at least pretend that this is an issue which needs to be rectified?

Yes, taxes need to be raised, the issues of who bears the brunt of that tax and for how much is a huge issue which needs more than a cursory thought; but allowing families and beneficiaries to swing in some sort of purgatory is unconscionable. You all knew this was coming for more than a few years.

Please get something done.

Thank you in advance,
Me

Will the Estate Tax Disappear? - WSJ.com

Many people hope the federal estate tax will disappear next year, as scheduled. They could be sorry if it does.

Back in 2000, Congress enacted a gradual loosening of the estate exemption. It has since risen to its current level of $3.5 million per individual, or up to $7 million per couple. The tax is scheduled to lapse just for next year and return in 2011.

Washington insiders are betting lawmakers won't let that happen. Instead they believe Congress is likely to act before the end of this year to extend the current system through next year. And perhaps they should, because getting rid of the estate tax actually would cause problems for most taxpayers.

At issue is the "step-up in cost basis" that all assets receive when an owner dies. The way the law is currently written, if the estate tax goes away, so does the step-up in cost basis. That's where the problem lies.

via online.wsj.com

The step-up in basis is one of the most valuable tools utilized in estate settlement. In most non-taxable estate, setting the basis for properties can be the most important tasks because of the step-up rule.

Presume that husband passes away owning 1,000 shares of Coca-Cola bought in 1960 for $1/share. In 2009, it is worth $80 share. If husband sells the stock prior to his death, he would report capital gains on the $1 purchase price (the basis). If he passes away holding that stock, the basis "steps up" to the date of death value in 2009. The surviving spouse then can sell the stock if necessary using the 2009 basis as a starting point. Much less capital gains, much better result for the heirs.

If the step-up rules go away when the estate tax goes away, surviving spouse has little incentive to sell that stock due to the taxes.

With tangible goods such as antiques, valuations in the estate process (especially in a non-taxable estate)  can be very important (to set the basis) but relatively easy because you are looking at a date-of-death snapshot of that asset.  If no step-up, an antique may need to be valued at purchase date (for basis purposes ) and date-of-death (for inventory purposes). 

Seems like wishing away the estate tax isn't such a black and white issue.