Remember the old joke about advising clients to die in 2010 when there is no estate tax? Now that we're there, no one's laughing. "Absolute bedlam" and "congressional malpractice" are some of the nicer things normally mild-mannered professionals are calling the current estate tax situation.
Before Congress adjourned for the holidays, who dared believe the tax really would be eliminated as promised by George W. Bush's Economic Growth and Tax Relief Reconciliation Act of 2001? Conventional wisdom held that 2009's 45% death-tax rate and $3.5 million-per-individual exemption (inflation-adjusted, perhaps) would be extended.
But it didn't happen. And so on New Year's Day the federal estate tax expired, along with the basis step-up at death for all assets and several other transfer-tax rules, if only for a year. As you undoubtedly know, the EGTRRA itself expires at the end of 2010, resulting in the 2011 return of the estate tax with a $1 million exemption, among other things. Except the story doesn't end there.
Still Uncertain After All These Years
Congress may seek to restore the death tax retroactively to January 1 (with presumably something akin to '09 parameters). Treasury Secretary Timothy Geithner voiced support for retroactive reimposition at a February 2 Senate Finance Committee hearing. The problem is, retroactivity may not be constitutional.
"If an existing law is merely being modified, the courts have given great discretion to Congress to make that retroactive," says Mark Luscombe, the principal federal tax analyst at business-information provider CCH Inc. "But when a new law is being created, it's less clear whether retroactivity can be applied, although there haven't been any cases that have denied it."
The longer Washington dillydallies, the stronger the argument against retroactivity, potentially. "A brief period without an estate tax makes retroactive reinstatement look like a fix of an old law. There's more of a constitutional issue if Congress puts the tax in retroactively after some time without it," Luscombe says.
Meanwhile, at a February 4 press conference, Senate Majority Leader Harry Reid, D-Nev., was asked if the estate tax would be addressed in a jobs package. "Not in the near future," he responded.
Now What?
With estate tax uncertainty accreting by the day, advisors and clients alike are breathless with anticipation. "We spent January, along with our clients, in a state of mutual confusion," confesses Norvell E. Brasch, special counsel at Holme Roberts & Owen LLP in Denver. "It has been a little difficult to put a finger on exactly what to do."
The fog is particularly thick around 2010 deaths. How do you handle an estate knowing a tax might later be imposed on it? Already there are stories about heirs hounding executors to distribute assets quickly while there is no estate tax is on the books.
But distributions this year won't necessarily get them off the hook for taxes, says attorney/CPA Kenneth P. Brier, a partner at Brier & Geurden LLP in Needham, Mass. "The estate tax will or will not be imposed on 2010 estates depending on any effective date, possibly retroactive, that Congress might impose, not on the happenstance of when the executor might make distributions," Brier says.