ESTATE-TAX DEBATE HEATS UP AS THE AUGUST RECESS APPROACHES

Supporters and opponents of restoring the estate tax are calling on Congress to make a decision before the August recess. The estate tax stands at 0% but will rocket to 55% in 2011 for anyone with assets of more than $1 million. Estate-tax supporters, who say the revenue produced could help close the deficit and help state and local governments, want a bill that would return the tax to 2009 levels but on a more progressive scale -- estates would pay either nothing, 45%, 50% or 55% depending on their assets. Estate-tax opponents support a compromise bill that would set the tax rate at 35% with exemptions for anyone with less than $5 million in assets. The Hill

WHAT IS HAPPENING WITH ESTATE TAXES?

Would it be a good idea to die in 2010 to avoid estate taxes? This is a question that we cannot yet answer.

Congress is leaving behind a big tax mess. Many key issues remain unresolved for now. Although the House approved extensions for a group of expiring tax breaks, the Senate got bogged down in debate over health care overhaul, preventing it from tackling other must-do bills before year-end. The gridlock could lead to a train wreck on taxes in 2010. Not only will unfinished business have to be taken care of, but Congress will be staring at another major deadline because the Bush tax cuts will expire at the end of the year if nothing is done.

This session’s biggest failure is inaction on the estate tax. We are currently in limbo.

With no change in current law, the estate tax will disappear in 2010, then reappear in 2011 with a top rate of 60% and a low $1-million exemption. The generation-skipping tax will also end for a year, and the gift tax lives on but the top rate falls to 35%. A big problem as the law now stands is that some heirs of people who die in 2010 will owe capital gains tax when they sell inherited assets. Current law, which steps up the basis for inherited assets to the date-of-death value, is replaced by a convoluted system that starts with the decedent’s income tax basis. Executors are allowed to increase the basis of inherited assets by up to $1.3 million. So if they do not change the law it is a good estate planning tool to die this year.

Everyone in the estate tax business felt that some type of resolution would have been reached by now. This is a nightmare.

STATUS OF ESTATE TAXES

Around ten years ago, congress passed a law stating that in the year 2010 there would be no estate taxes. Nobody in the tax industry felt that this would really happen. Imagine this, Warren Buffett, whose worth billions of dollars in 2010, dies and he completely escapes estate taxes. The joke in the industry was to “advise your clients to die in 2010.” That’s the kind of humor that we tax people have.

Well, everybody thought the law would change and then five years passed; and now we are here three weeks before the end of the year and congress is now starting to say, “We’re going to lose a lot of money if there are no estate taxes in 2010; maybe we should change the law.”

Now they are discussing the possibility of making sure that there is an estate tax in 2010. Best guess is that they’ll pass a law sometime before the end of the year. Maybe they’ll leave the estate tax rate at three and one half million dollars. Who knows?

Oh, that’s not all, if congress does nothing the estate tax rate will revert back to $1,000,000 in 2011 with a high rate of 55%.

We’ll keep you posted as congress deals with this issue at the last minute.

The Washington Post has more information on the Estate Tax. Click here to read: Extending The Estate Tax.