2010 is one-third over and there is no evidence that Congress will fix the estate tax mess. It is difficult to advise clients who have had a family member die in 2010 of the family’s estate tax situation. Will the estate tax be reinstated retroactively to 2009 levels with a $3.5 million exemption amount and a step up in the basis of the assets, as Ways and Means Chair Sander Levin has recommended and many expected? Or will current law continue, with no estate tax for 2010 but also no step up in basis in assets, thereby triggering an income tax on the sale of the distributed assets if they exceed certain amounts? Or, at this late date, rather then face lawsuits challenging the constitutionality of a retroactive tax, will Congress allow taxpayers to choose either of the above alternatives? Of course, absent new law, in 2011 there is only a $1 million exemption amount.
Many practitioners are gun shy when it comes to predictions, considering how we have arrived at the current situation. And although an April 23, 2010 Congressional Research Service (CRS) Report reaffirmed that a very small percentage of estates are subject to estate tax, even at a $1 million exemption, this does not provide comfort or certainty to the clients I regularly see trying to protect themselves and their families. The same Report claimed that the estate tax effect on closely held businesses and charities also is minor. (CRS’ mission is to provide objective and nonpartisan research and analysis to Congress.)
Interestingly, although Congress and the President can’t fix the most important and fundamental estate tax issues, they are again seeking to curb an estate planning strategy utilized by taxpayers to transfer assets. The strategy, called a "grantor retained annuity trust," or "GRAT," allows individuals to transfer appreciation in assets to the next generation with virtually no tax consequence after the expiration of a certain time period, currently only two years. (See my posts from 1/28/08, 4/21/08, 4/13/09, and 5/18/09 pertaining to GRAT’s.) The proposed legislation would impose gift tax on the transferred assets and require that the donor survive 10 years for the GRAT to be effective.
But why should we be surprised that Congress is more focused on GRAT's, a narrow planning tool applicable to very few, rather than fix the fundamental estate planning issues affecting many of us.
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