Tax Law Blog | IRS Tax Attorneys

While Congress dilly dallies, the states are racing to come to the aid of families whose estate plans have been thrown into disarray by the Jan. 1 lapse of the federal estate tax. That lapse could, among other things, lead to the unintended disinheritance of spouses, which could in turn lead to expensive legal fights among family members and, ultimately, the impoverishment of some widows or widowers. It could also, ironically, force some families to pay extra state estate taxes.

Legislators in a handful of states, led by Virginia, have already introduced legislation to try to head off such bad results. Virginia’s House of Delegates passed its “emergency” bill unanimously Tuesday and the state’s Senate is expected to take it up immediately. Similar bills are pending in Maryland, Nebraska, South Dakota, Tennessee and Washington. Other states, including Florida and New York, have somewhat different legislation pending.

Most of the new emergency laws would set a default rule for interpreting wills and trusts while the federal estate tax is repealed, if the document itself doesn’t spell one out. The rule: Any tax terms or formulas should be read as if the estate tax law of 2009 were still in effect. The proposed emergency laws also typically include a backstop provision allowing any potential beneficiary or executor to go to court, within a year from the date of death, if he or she doesn’t think that this default is what the deceased really wanted. (Florida takes a different approach; there’s no default rule, just the opportunity to go to court.)

“The primary benefit is going to be keeping families out of state court litigation,” says Dana Fitzsimons, an estate lawyer with McGuire Woods in Richmond, Va., who helped legislators draft the Virginia bill.

Estate lawyers have a keen interest in pushing through these laws, beyond just concern for the welfare of their clients. By clarifying poorly drafted, ambiguous documents, these laws could prevent a flurry of legal malpractice suits.

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The expiration of the estate tax at the beginning of the year, and the threat of it returning with a vengeance in 2011 at a 55 percent rate for estates over $1 million, is giving estate planners fits.

Senate Finance Committee Chairman Max Baucus, D-Mont., had attempted to get at least a temporary extension in place by the Senate after the House voted to extend the estate tax at its current rate of 45 percent for estates over $3.5 million, but he was blocked in the effort by Senate Republicans, and some Democrats as well. Now he wants to get the estate tax fix passed sometime next year and make it effective retroactively, but that strategy might not survive the inevitable legal challenges.

Meanwhile, tax attorneys are reporting cases where clients are on life support and their families are trying to make decisions based on the prospects of tax law changes, according to The Wall Street Journal. Others are inserting provisions in their health care proxies that would let family members who decide on end-of-life care take into account the changes in estate tax law.

The doubts are sure to increase next year and pressure will mount on Congress to decide what to do as the days tick by.

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NCBA leaders are disappointed the U.S. House ignored repeated calls for estate tax reform by passing a bill that permanently extends the tax at 2009 levels. According to NCBA President Gary Voogt, a cattleman from Michigan , by keeping the current flawed law in place, representatives have done America ’s family farmers, ranchers and small businesses a disservice.

It’s now up to the U.S. Senate to pass meaningful and permanent relief from the onerous tax. If senators fail to act by the end of the year, the estate tax will revert to a staggering 55% on estates worth only $1 million or more.

NCBA strongly supports legislation passed earlier this year as part of a Senate budget resolution amendment. The amendment calls for raising the amount of an estate exempt from the tax to $5 million per individual and $10 million per couple, indexed for inflation, while reducing the maximum tax rate to 35%.

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Job creation will probably have to wait until next year but the House is determined to extend the estate tax break permanently before leaving for the holidays, Majority Leader Steny Hoyer (D-Md.) told reporters Tuesday.

House Democrats also want to see an extension on unemployment insurance signed into law by Christmas, Hoyer said during his weekly press conference, but a new bill to stimulate employment will likely remain in the planning stages until after Congress returns in January. “The important thing from my perspective, speaking for Steny Hoyer, is to get a jobs package that will work, not getting one right now,” he said.

In addition to unemployment, Hoyer said infrastructure spending and aid to states are top priorities, with more discussion of public jobs and a jobs tax credit — the latter largely dismissed as ineffective by economists — still to come.

Before the week is out, however, the House will vote to permanently extend the lower estate tax rates established during the Bush administration, which are set to expire at the end of this year. Under the law, estate taxes were lowered from 55 percent on estates worth more than $1 million to 45 percent on those over $3.5 million. Without changes, the standing law will eliminate all estate taxes next year and then reinstate the old 55-percent tax rate the following year.

“We know that many in the business community in particular are very strongly for a permanent fix on this,” Hoyer said.

An extension of an existing law — especially a tax cut — is naturally easier to move through Congress than a wide-ranging jobs program. And the standing estate-tax law’s unusual expiration clauses were designed to require a decision at this point — how to pay for the tax break, which Congressional reports say will cost roughly $234 billion over the next 10 years.

The tax break still isn’t paid for. Instead of making that tough decision, House leadership plans to raise the ceiling on government debt. “There is no alternative to passing the debt limit extension,” Hoyer said, adding that it should be high enough to cover lawmakers through the midterm elections next November.

Of course, House action is no guarantee of final passage. Across the Capitol, Sen. Max Baucus (D-Mont.) has introduced his own estate-tax extension tied to inflation, but the Senate is consumed with health care reform and unlikely to tackle the issue before the new year.

Hoyer touted the House passage of emergency tax relief and extensions of COBRA eligibility as examples of support for suffering Americans. He acknowledged, however, that GDP growth and signs of recovery on Wall Street aren’t good enough for the growing millions who are out of work.

“My litmus test… will be when the economy starts creating jobs, not losing jobs,” he said.

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With Congress facing a deadline to act on the estate or inheritance tax, which taxes property as it passes from one generation to the next, farmers, ranchers and others who participated in an online discussion of the issue last week stressed the need to support the Family Farm Preservation Estate Tax Act.

H.R. 3524, introduced by Rep. Mike Thompson, D-Napa, and Rep. John Salazar, D-Colo., would exempt farm and ranch assets from estate taxes, as long as the property remains as a family agricultural operation.

Congress will likely move to act on estate tax legislation before the end of the year, because current law passed in 2001 will phase out the estate tax entirely in 2010—only to have it reappear in 2011 at pre-2001 levels. Farm organizations say that returning to the previous estate tax levels would severely damage a family’s ability to pass a farm or ranch to the next generation.

To educate people about the benefits of the legislation for farm and ranch families, the California Farm Bureau Federation led a discussion of the estate tax issue during the Oct. 27 session of #AgChat, a live, online chat conducted via the Twitter social media site, where participants discuss issues important to agriculture.

“This #AgChat was a step in the right direction. I think we got our message across that everyone should support the Thompson/Salazar bill to exempt farm and ranch assets from estate taxes if the property stays in agriculture,” said Josh Rolph, California Farm Bureau director of national affairs. “With Twitter, you are limited to the number of words that you use, so what you did say, you had to make count.”

During the #AgChat on the estate tax, Rolph reported that an estimated 50 people from coast-to-coast actively participated in the discussion, and that many others may have monitored it.

Stanislaus County dairy farmer Ray Prock Jr., an active participant on Twitter who has a high number of followers subscribing to his online posts, served as guest moderator for the two-hour discussion.

“The minimum goal was to broaden the awareness of the estate tax problem throughout the United States—that it is not just a California problem—and we accomplished that,” Prock said.

Participants in the online session expressed concerns about the impact of the estate tax on farm families, such as the selling of farms to pay for the tax and therefore the paving over of agricultural land.

Emily Robidart Rooney, who comes from a multi-generational farming family in San Joaquin County and serves as vice president of the Agricultural Council of California, discussed her family’s experience with the estate tax on #AgChat.

“As any typical farm family, my family has had to do estate planning. Large expenses in life insurance and attorney bills are incurred in an attempt to avoid this tax,” Rooney said. “Years of these costs do in no way guarantee that you’re ‘out of the woods’ when it is time for a generational transition. That money would definitely be better utilized if it could be invested back into the family business and put toward buildings, tractors and other equipment.”

Like the actions taken by Rooney’s family, a participant in Nebraska said significant sums of money are being spent each year on updating estate tax plans. Another cited money going to attorneys’ fees.

An additional concern focused on the next generation of farmers—those who may be stuck with the burden of paying an estate tax and who would be forced to sell rather than continue farming where earlier generations left off.

“A shrinking percentage of farmers is under the age of 45. The estate tax hurts the next generation of farmers and ranchers,” Rolph said.

Participants in the online chat also discussed how estate taxes levied on farms affect consumers: a reduction in the nation’s food supply; land taken out of agricultural production; a blow to the local food movement; and an assortment of environmental impacts.

Siskiyou County rancher Jeff Fowle said, “Blacktop and gated communities will not feed America and are far from being environmentally friendly.”

“We need H.R. 3524. It’s not perfect, it’s not full repeal, but it does save us from the tax,” Rolph said during the online discussion.

At the conclusion of the #AgChat discussion, participants cited a number of actions that would be beneficial in advocating for farmers and ranchers as it relates to the estate tax, such as contacting members of Congress, sharing personal stories, writing opinion pieces for news publications and taking part in additional social media outlets.

As a first-time #AgChat participant, Rooney said she appreciated the discussion.

“I really enjoyed the dialogue in the fast-paced environment. It allowed for an in-depth discussion about the political dynamics and why H.R. 3524 is so important now,” Rooney said. “I saw the experience as Californians making the case to others in the country, to try to further our cause with an audience that is already participating in one way or another.”

To follow the progress of the estate tax legislation, visit the California Farm Bureau Web site at www.cfbf.com and join Farm Team to receive online updates and Action Alerts.

(Christine Souza is an assistant editor of Ag Alert. She may be contacted at csouza@cfbf.com.)

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Scheduled for Oct. 27, people will have an opportunity to discuss how farm families deal with the federal estate tax on Twitter’s #AgChat, a live, online chat where agriculturists and others discuss issues important to agriculture. The online discussion happens every Tuesday from 5 p.m. to 7 p.m.

The purpose of the Oct. 27 #AgChat will be to share general information about the issue of the federal estate tax, to allow farmers and ranchers to discuss how the tax has personally impacted their families and to provide general facts about the estate tax to educate others.

During the chat, pending legislation will likely be part of the discussion, such as the Family Farm Preservation Estate Tax Act, H.R. 3524. The bill would exempt farm and ranch assets from estate taxes, as long as the property remains as a family agricultural operation. This would enable farm families to continue farming without having to sell property or even their entire farm to pay estate taxes.

Introduced by Rep. Mike Thompson, D-Napa, and Rep. John Salazar, D-Colo., the bill would also exclude land enrolled in a qualified conservation easement from the estate tax.

“This discussion couldn’t come at a better time, since the fate of the estate tax will most likely be decided by the end of this year,” said Josh Rolph, director of congressional relations in the California Farm Bureau National Affairs and Research Division.

“My hope is that those taking part feel a sense of urgency that leads to increased support for the Thompson/Salazar bill,” Rolph said. “Members of Congress need to hear from us, and they need to hear from us now.”

The discussion will be moderated by Stanislaus County dairy farmer Ray Prock Jr., an active participant on Twitter who has a high number of followers subscribing to his online posts.

To participate in the live discussion, Twitter members may log on to www.tweetchat.com/room/agchat or twubs.com/agchat.

People who are not subscribed to Twitter, but would still like to monitor the live discussion, may do so at the latter site, twubs.com/agchat.

Connecticut residents will no longer have to flee to Florida to avoid the Connecticut estate tax because of a new law enacted Sept. 8 (House Bill 6802).

Beginning with deaths occurring on or after Jan. 1, 2010, estates (and gifts) of as much as $3.5 million will be exempt from Connecticut estate (and gift) tax. That moves the threshold for taxable estates (and gifts) up from the current $2 million level.

Importantly, the new law will lift the Connecticut “cliff” where a single U.S. dollar bill counts as $101,700 in Connecticut.

The cliff, which will die on Jan. 1, 2010, is an unfair happenstance for estates a smidge over $2 million. Right now, an estate of $2 million pays no Connecticut estate taxes. But, an estate of $2,000,001 — just a dollar more — pays Connecticut $101,700.

These are two very important estate tax changes. And there is one more. The new legislation also reduces rates by 25 percent beginning in 2010.

“These changes are a step in the right direction,” says state Rep. Livvy Floren, R-149th Dist.

Under current law, an estate (or gift) of $3.5 million pays a Connecticut estate tax of $190,800, according to the state Office of Fiscal Analysis. Under the new law, for deaths occurring after the end of 2009, the tax will be zero, and there will be no cliff — that is, the tax for estates above $3.5 million will be taxed only on the amounts above $3.5 million. The tax rate is 7.2 percent for estates of $3.5 million to $3.6 million, down from 9.6 percent.

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In the area of estate tax law, the only thing that is certain right now is that things are going to change. The Economic Growth and Tax Relief Reconciliation Act, passed in 2001, came with a “sunset clause,” giving Congress until Dec. 31, 2010 to extend the law or else it would disappear and the laws previous to its passing would go back into effect. Under current law, the estate tax disappears entirely in 2010, and then returns with a vengeance in 2011 with lower exemptions and heftier rates.

Several bills designed to clear up some of the confusion around estate tax laws, are being reviewed, and are set to make their way through Congress in the coming months.

Some certainty on the horizon
The “Taxpayer Certainty and Relief Act of 2009” aims to eliminate some of the uncertainty and fluctuation around estate taxes and exemptions. The bill makes the 2009 estate tax, gift tax and generation skipping tax laws all permanent. Some of the elements of this proposal include:

• A permanent estate tax exemption of $3.5 million for an individual and $7 million for a married couple. An amended version approved by the Senate sets the exemption at $5 million. Under current legislation, in 2011 the exemption reverts to only $1 million for an individual.

• A maximum estate tax rate of 45 percent. An amended version approved by the Senate sets the rate at 35 percent; currently, the maximum rate is 55 percent. There will be a 5-percent surcharge on very large estates.

• A portability provision for married couples allows the unused exclusion amount of the first spouse to die to be added to the surviving spouse’s exclusion.

• A permanent gift-tax exemption of $1 million and permanent generation-skipping transfer-tax exemption of $3.5 million. The exemption doubles for married couples.

• Inflation indexing provides for an increase in the amount exempt from estate taxes as the cost of living goes up. This indexing would be in $10,000 increments, starting in 2011.

• Reunification of the estate and gift tax, meaning that the $3.5 million exemption would apply for estate, gift and generation skipping tax purposes. The same rates would apply to all three taxes as well.

In general, the increase in the estate tax exemption and the decrease in the estate tax rate that this proposed legislation offers is good news to people with large estates. However, some other proposals are on the table that change the way other tools for passing wealth could be utilized.

Limitations on current techniques
Other proposals under review seek to limit the way other tools and techniques can be used to pass wealth with minimal taxation.

Crummey provisions: Proposals are aimed at limiting the use of irrevocable trusts with Crummey provisions to qualify gifts for the annual exclusion from gift tax.

Duration of generation skipping tax: Proposed changes would limit the duration of the exemption to one additional generation, essentially eliminating the perpetual deferral of estate or generation skipping taxes.

Valuation discounts: Proposed changes would eliminate marketability and minority discounts and passive assets, preventing the use of family entities to transfer passive investments at discounted values for estate and gift tax purposes.

Qualified personal residence trusts: Proposals seek to eliminate use of these trusts, which allow clients to transfer to their beneficiaries a portion of the appreciation in their principal residence, estate tax and gift tax free.

Grantor-retained annuity trusts: Proposed changes would limit the use of one of these trusts by imposing upon them a minimum of 10 years.

The bottom line
Changes in the economic landscape, tax law, or your personal or financial situation can make even the best estate plan outdated. A periodic reassessment can ensure that your plan adheres to current tax law and will continue to meet your objectives.

These new tax law provisions can greatly affect your estate plan, so be sure to reexamine your plan with your professional adviser.

Federal estate-tax laws are on a collision course with chaos in 2010, thanks to an old piece of legislation that’s on schedule to come to full fruition less than six months from now.

Many estate-planning experts don’t believe Congress and the White House will let matters transpire as mandated by the Economic Growth and Tax Relief Reconciliation Act of 2001, which remains on the books.

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Struggling to find ways to pay for the president’s signature health care overhaul, the administration on Monday proposed to raise nearly $60 billion more over 10 years mostly from tightening rules for inheritance taxes affecting the wealthiest estates.

The Treasury Department’s proposals, and several others affecting taxation of life insurance and some other financial products, are intended to fill a gap that has opened up in President Obama’s health care plans.

Revised estimates show that his main idea for financing the initiative — a 28 percent limit on deductions for Americans in the top two tax brackets — would raise $266.7 billion over a decade, not $318 billion as he had projected in his overall budget blueprint last February.

Filling that gap actually understates Mr. Obama’s problems in paying for reforming health care. The deductions limit has hit a wall of opposition in Congress, with the Democratic chairmen of the House and Senate tax-writing committees among others objecting that it could depress tax-deductible charitable contributions. The proposal accounts for half of Mr. Obama’s proposed $635 billion, 10-year reserve fund to introduce cost-saving changes into health care and to expand coverage to the uninsured; the other half would come from Medicare savings under the Obama budget.

The latest proposals to raise revenues are included in documents from the Treasury and the Office of Management and Budget that provide new details on the preliminary budget released in February, when the administration had been in office just a month.

More than $24 billion of the nearly $60 billion to be raised over 10 years would come from estate and gift taxes that would hit less than three-tenths of 1 percent of estates in any year, according to a senior Treasury official, who spoke to reporters on condition of anonymity.

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