Estate Tax death creating chaos in estate planning

From MiBiz – Monday, February 15, 2010

WEST MICHIGAN — With headlines like ‘Welcome to Bizzaro World’ in the normally staid publication Estate Planning, there is every indication that the world of estate planning has been turned on its ear.

It’s not that no one saw it coming. When Congress approved the Economic Growth and Tax Relief Reconciliation Act of 2001, the law dropped the top tax rate to 45 percent and upped the amount exempted to $3.5 million. The law stipulated that in 2010, if no action was taken, there would be no estate tax for 12 months, before reverting to the original estate tax rate of 55 percent and $1 million exemption in 2011.

The conventional wisdom was that when the act expired on Dec. 31, 2009, there would be a replacement law in place. The estate tax generated $10 billion annually, and tax professionals expected Democrats would want to continue the revenue stream.

Then 2009 came. And went.

The House voted to permanently extend the present 45 percent estate tax rate, and the $3.5 million, per person, exclusion from estate taxes, but the Senate could not get the measure through before year’s end.

The inaction by the Senate to resolve the issue has opened a Pandora’s box of problems for estate planning professionals, explained Linda Wasserman, trusts and estates chair at law firm Honigman, Miller, Cohn and Schwartz LLP.

“I do not know a single practitioner in this area who thought that this would happen,” Wasserman told MiBiz. “It took absolutely everyone by surprise.”

Tax professionals have been scrambling to understand what exactly the ramifications are for their clients. The lack of an estate tax doesn’t mean that estates for people who die in 2010 will be transferred tax-free. Capital gains taxes still will apply, and with no exemption, heirs could be on the hook for considerable tax burdens.

The IRS would use the original price paid for an asset when computing heirs’ tax liabilities, instead of the value upon the owner’s death. This carries particular risk for estates with considerable real estate holdings, say tax attorneys.

If a real estate developer had taken loans to fund development of property, there could be capital accounts creating a negative basis for the estate. When an heir went to sell the property, the transaction could be taxed from the original, negative basis plus the sale price, creating the possibility for being taxed more than it is worth, Wasserman said.

“You could have a situation in Michigan where an heir could inherit property with no value and still have a huge tax liability,” Wasserman said. “The grantor’s death wouldn’t trigger the tax, but when the heirs went to sell the property, they may have to pay more in tax than the property is worth.” 

Calling the situation Congress has left for accountants and lawyers “unconscionable,” Claude Titche, partner at Beene Garter, told MiBiz that the estate tax issue has been at the mercy of the debate over healthcare. As the fight has dragged on, important legislation has been held up.

“Politics does not make good tax policy,” Titche said. “Most people think that they will go back and fix this, but planning is difficult when you don’t know what the law is going to be.”

Congress is taking up the issue, and a bill by Sen. Dick Durban, D-Ill., is wending its way through the Senate, though lawyers and accountants question what the impacts could be. If the law were written so that the taxes would be assessed retroactively, as many suggest it will be, this could open up questions of whether it is constitutional for Congress and the IRS to do so, said Jack Van Slambrouck, principal and deputy practice group leader for Miller Canfield’s Personal Services Group. Van Slambrouck said the uncertainty this has caused raises the possibility of litigation among heirs, particularly in estates with formula clauses divvying up property among family members, as the estate tax’s demise could mean some heirs are disinherited.

“I never before saw this sort of uncertainty in the estate tax. It makes it extremely difficult to do any sort of planning with clients,” Van Slambrouck said. “My best word of advice is to get in and revise your documents — get with your lawyer. Make sure the intent of the client is carried out in the documents. This may change your formula.”

Wasserman agreed, saying where she could give clear advice in 2009 about estates, the outlook for 2010 still is very cloudy. 

“It is very difficult to give any sort of advice at this point. I am looking at clients’ estate plans to look at disaster situations,” Wasserman said. “We’ve sent letters to clients to advise them of the situation, and we’re watching what happens.”

Credit article to:  Nathan Peck | MiBiz

This article appeared in the Monday, February 15, 2010 issue of MiBiz


Explore posts in the same categories: Estate Planning

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: