(Dow Jones) Many heirs may be feeling more frustrated than lucky, in what should be a very fortunate year for them tax-wise.
A unique set of issues stemming from the one-year lapse of the federal-estate tax is actually making it hard for some people to collect an inheritance from a relative who died in 2010.
The lack of an estate tax has caused delays in administering wills, made worse by new income tax rules that apply to inherited items. In many estates, smaller distributions can be made from a will, but tax attorneys say it would be unwise to make larger ones until the tax picture is clearer.
The Bush tax cuts of 2001 steadily pared the estate tax rates and increased the exemption--that is, the dollar amount at which an estate qualifies to be taxed--and Congress didn't step in to prevent the one-year repeal for 2010. Next year, the top rate on estates over $1 million will be 55% unless lawmakers make a change.
Many wills did not provide for the one-year gap that took everyone by surprise, and so still refer to the tax in a way that may disinherit someone accidentally or otherwise change the intention of the deceased. They contain boilerplate clauses that refer to tax rates and exemptions that no longer apply.
Tax attorneys have "done a lot of worrying" about these so-called formula clauses, said Elizabeth G. Deleery, a partner at Osborne, Helman, Knebel & Deleery in Austin, Texas. If a will says, for example, to leave the amount exempt from estate tax to the children and the rest of the estate to the wife, "clients are not happy when we tell them there may be a problem, and they may want to consider doing a codicil to fix it," she said.
A dozen or so states have, or are working on, laws to fix messes left by formula clauses, often by applying 2009 estate tax rules. Connecticut, Florida, Maine, Nebraska, South Dakota, Maryland, Washington, Indiana, Tennessee and Virginia are among them.
The prospect of a retroactive estate tax also plays into how quickly people are collecting on bequests. The worry is that lawmakers could levy such a tax, going back to the start of the year. In that case, a beneficiary who had already taken an inheritance tax-free might owe tax after all.
This possibility grows slimmer each day, but worries about it carry enough weight to have prompted some advisers to freeze wills until the end of the year.
Lauren Y. Detzel, chairman of the estate and succession-planning department at Dean, Mead, Egerton, Bloodworth, Capouano & Bozarth in Orlando, Fla., said a big concern are new income-tax rules to figure the value of inherited items. The task is to find the cost basis of an item for tax purposes, used to figure capital gains once the item is ultimately sold.