Spring 2010 issue of Horizons

Raise Your Expectations CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS

If a tax patch is passed, when will that happen? In December 2009, the House of Representatives passed a bill that would have prevented estate tax repeal from taking effect in 2010; however, the Senate did not act on that measure. Since under current law there is no estate tax, any action Congress may take in 2010 may be made retroactive back to January 1, 2010. Given that the estate tax law is in a flux, individuals should review their current estate plan to ensure that it meets their needs in this time of uncertainty. Under a longer time horizon, there are many estate tax bills floating around Congress that have not been passed. Looking at these bills and what other tax professionals have suggested, we can make the following predictions, always bearing in mind the quote from Niels Bohr at the top of this article. 1. Estate Tax Exemption: In 2001, the amount that a taxpayer could leave at death without incurring an estate tax was $675,000. In 2009, that amount was $3.5 million. Various bills and proposals would adjust this amount to somewhere between $2 million and $5 million per taxpayer. For purposes of predicting where the exemption will end up, $3.5 million indexed for inflation seems to be as good a prediction or “guess” as any. The rationale is that it is difficult to take something away once it is given. Under this theory, the exemption should not drop below $3.5 million. Further, given budget constraints, it may not be fiscally wise to increase the exemption. Indexing this exemption for inflation or at least adjusting it periodically over the next decade also seems fair (although who says the tax law is fair).

In 2009, every taxpayer had a $3.5 million exemption from the federal estate tax, meaning that if a taxpayer had assets worth $3.5 million or less at the time of his or her death in 2009, no estate tax would be due. Anything over $3.5 million would be taxed at a 45 percent rate unless such excess was distributed to a charity or a surviving spouse (or a marital trust for the surviving spouse’s benefit). For 2010, the estate tax is scheduled to be repealed effective as of January 1, 2010. If no Congressional action is taken, a taxpayer who dies in 2010 will not be subject to an estate tax no matter what the value of his or her estate is at the time of death. However, under the act, estate tax repeal is short- lived. When the act was passed in 2001, projected loss of government revenue would have been too great if estate tax repeal was made permanent. In order to get the law passed, it had to end in 2010. Therefore, under the act, and after a one-year repeal in 2010, the estate tax is scheduled to come back on January 1, 2011. When the estate tax returns, it is scheduled to have only a $1 million exemption (as compared to a $3.5 million exemption in 2009) and a 55 percent tax rate (as compared to a 45 percent tax rate in 2009). Although the future of the estate tax is far from clear, most tax professionals, when pushed, probably believe that Congress will pass some type of stop- gap measure, or tax patch, that will basically extend the 2009 estate tax law through 2010. Some believe that a one-year tax patch will lead to future one-year patches similar to what Congress has traditionally done with the alternative minimum tax. Others believe and hope that Congress will take the time to study and implement a permanent estate tax law that will give taxpayers (and their advisors) certainty. What a difference a year can make! So what will happen in the next six months or the next decade?

18 u spring 2010 issue