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Congress Nears Rx For Estate Tax Pain
By Arden Dale, Wall Street Journal
Washington. D.C. (October 30, 2009)
It has been one long, collective migraine for those trying to plan around the estate tax, but meds are on the way. At least, that is what many now think. Congress just won't let 2010 roll in without fixing the tax at the 11th hour, observers said.
Lawmakers fighting over the tax's uncertain fate are up against a wall. Unless they act, it will be repealed for one year in 2010. In 2011, it would return to levels not seen since before President George W. Bush signed landmark tax legislation in 2001. That would only allow a $1 million exemption and charge any value over that with a 55% levy.
The topsy-turvy scenario that would result would create a planning nightmare everyone would like to avoid. More powerfully, Democrats don't want the tax to go to zero on their watch.
"I think it's almost certain that Congress will do something, and it's most likely in my opinion to be a permanent extension of 2009 law," said Ronald D. Aucutt, a partner in the McLean, Va., office of law firm McGuire Woods.
For now, the staff on the tax-writing House Ways and Means Committee is working on legislation that would set the rate of the tax at current levels. It would continue the 2009 estate tax parameters indefinitely, exempting estates under $3.5 million, or up to $7 million for a married couple, and taxing inheritances above that at 45%.
Ironically, extending the 2009 rates would cost taxpayers some $233 billion over the next decade because current law assumes the rates will increase sharply in 2011.
Dean A. Zerbe, formerly senior counsel and tax counsel to the U.S. Senate Committee on Finance, and now national managing director of alliantgroup, a tax services firm, said he thinks it "very likely Congress will pass a one- or two-year extension, straight extension of current law, late this year."
The American Institute of Certified Public Accountants has its fingers crossed that Congress will act, and thinks it likely it will. The group favors a permanent fix but "we'll take a one-year patch rather than not knowing what's going to happen next year," said Eileen Sherr, senior technical manager at the AICPA's tax division.
Right now, added Sherr, it is very hard for individuals and estate planners to do a good job when it's unknown what the law will be "just a few months down the road, let alone a year from now."
An awful prospect should the repeal occur is a return to tax rules known as the carryover basis. This means an heir's tax basis in property is "carried over" from when the person who bequeathed it originally got it. That's a big difference from current rules, which let heirs "step up" the tax basis to the value at the death of the person who bequeathed it.
Carryover basis "would be very burdensome for taxpayers, for anybody who has to deal with estates," said Sherr. Besides that, it could mean a much bigger capital gains tab on many assets.
So, in the meantime, what do estate planners advise wealthy clients about the estate tax?
Len Adler, wealth adviser with JPMorgan Private Bank in Florida, said he tells clients "to forget about the estate tax being repealed, at least for the foreseeable future."
Arden Dale is a Getting Personal columnist who writes about personal finance; she covers topics including tax and estate planning, retirement, investment strategies, and financial needs of small businesses. She can be reached at 212-416-2234 or by email at arden.dale@dowjones.com.
(c) 2009 Dow Jones & Company, Inc.
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