Lots to think about even though there is no Federal Estate Tax. Remember, there is a capital gains issue and a MA Estate Tax issue.
Bloomberg Business Week
By: Amy Feldman
Sure, heirs of the ultra-rich who die this year will get a break on estate taxes, but they could wind up paying even more in taxes on capital gains
For some time, people have been making morbid jokes about bumping off their rich relatives in 2010, a year that has no federal estate tax. The George W. Bush-era law that lowered the tax contained a one-year gap that Congress has never gotten around to fixing. The tax is set to return, at a 55% rate, on Jan. 1, 2011.
Few are laughing about it now. While heirs of the ultra-rich who die this year may enjoy an estate tax break (17,172 taxable estate tax returns were filed in 2008, according to IRS data), this gap year is having an unintended consequence. Far larger numbers of affluent families who suffer deaths this year could wind up paying stiff capital-gains taxes on inheritances. That's because of the disappearance of what's known as the "step-up" in basis, which allowed assets to be revalued for tax purposes at the time of death. "Many people are going to be worse off than before," says Clay R. Stevens, director of strategic planning at Aspiriant, a Los Angeles wealth-management firm. "If you've only read the sound bites, you've been misled."
Under last year's rules, estates below $3.5 million (or $7 million for a couple) were exempt from the estate tax; people above those limits were hit with rates as high as 45%. Crucially, assets were revalued at the time of death—"stepped up" to their full current value and not subject to capital-gains tax on past appreciation. When the estate tax went on hiatus, the "step-up in basis" rule for valuing assets went, too, so heirs are suddenly liable for capital gains on the past appreciation of assets they inherit and sell. For those who are bequeathed homes that have grown in value, family businesses that have expanded, or stocks that have risen in price, the old "step-up" rule let them start with a clean slate, owing no capital-gains taxes when they sold the assets. Not anymore.
An executor can now assign a "step-up" basis of up to $1.3 million to assets in the estate, and an additional $3 million for assets left to a surviving spouse. Many affluent families that have held assets for decades will bump up against those limits. Consider someone who inherits from their widowed father a home purchased for $100,000 decades ago that is now worth $2.5 million. Under last year's rules, assuming that was the only asset in the estate, there would have been no tax due because the estate would have been below the exemption amount. This year there would be no estate tax due either, but there would be capital-gains tax due on the $1.1 million in gain above the allocated step-up—$165,000 at the current 15% federal rate.
Things get more complex when family dynamics come into play. If there are multiple assets going to multiple heirs, the executor must choose how to allocate that $1.3 million in tax basis among the assets, a Solomonic task. "It may be applied so that it doesn't equally benefit all beneficiaries," Aspiriant's Stevens says. "You have to say, 'I'm giving you this asset and you get the step-up in basis, but I won't give it to that asset.' So two beneficiaries could receive the same fair market value of assets, but different amounts of aftertax value."
Take that example a step further. Assume that in addition to the $2.5 million house, there's $2.5 million in IBM (IBM) stock, bought for $500,000. If the house goes to the deceased's daughter and the stock to the son, the two would seem to get equal amounts. But because the daughter will owe more capital gains when she sells the house, she has actually received less—unless the executor allocates a larger portion of the step-up in basis to offset it.
Brent R. Brodeski, managing director at Rockford (Ill.) wealth-management firm Savant Capital Management, outlines a scenario where one adult child inherits a family business worth $5 million, with a tax basis of $1 million, and the other inherits $5 million in cash. Last year those bequests were equivalent in value. But without the step-up, the family business has an embedded capital gain that would be due at the time of the sale. Even if the executor allocated all of the $1.3 million to the business, that would still be the case, since there's $4 million in appreciation. "Does that mean that you have to look at the family business net of tax, and the kid with the cash has to ante up to the kid with the business?" Brodeski asks. "The kid with the cash says, 'My brother doesn't want to sell it, so I don't want to give him a bonus.' And the kid with the business says, 'I don't know if I want to pass it down to my kids, I might want to sell it.' How do you resolve that debate?"
These questions fall to executors, who face potential lawsuits from disgruntled heirs. There's also a record-keeping nightmare: tracking capital improvements parents made to a home or determining all the stock splits that occurred in a stock over 50 years. Estate attorneys are urging children of elderly parents who expect to inherit property that has substantially appreciated to ask parents to gather records now.
Last year the conventional wisdom was that Congress would fix the estate tax problem before yearend. More than three months into 2010, it's clear that even if Congress fixes the rules, it won't happen fast enough to forestall some families' estate tax hell. "I imagine we'll have decades-long court battles over it," says Brodeski. "It's a big, fat mess."
Feldman is an associate editor with Bloomberg BusinessWeek in New York.
Showing posts with label Estate Tax. Show all posts
Showing posts with label Estate Tax. Show all posts
Monday, May 3, 2010
Monday, March 22, 2010
REPORT: ESTATE TAX BURDEN FALLS DISPROPORTIONATELY ON SAME-SEX COUPLES
Here is a link to an interesting and humbling study released from UCLA concerning Same Sex couples and the Estate Tax.
The headline reads: New Study by Williams Institute Finds that Exclusion from the Estate Tax Marital Deduction Will Cost Affected Same-Sex Couples $3.3 million On Average
For the key findings and links to the full report, click here.
The headline reads: New Study by Williams Institute Finds that Exclusion from the Estate Tax Marital Deduction Will Cost Affected Same-Sex Couples $3.3 million On Average
For the key findings and links to the full report, click here.
Saturday, March 13, 2010
No Federal Estate Tax, but What About Your State?
As a reminder, we in MA have a $1,000,000 estate tax. Our trusts and wills account for this. If you have any questions, always feel free to email or call the office.
By: Paul Sullivan
The New York Times
The first quarter is nearly over, and the federal government has made no move to reinstitute the estate tax. So dying today seems free, right?
There is just one problem: If you live in one of 20 states with a state estate tax, you could find your existing estate tax plans causing more harm than good.
State estate taxes are not new. They had just been a secondary element in the course of figuring out the much higher federal estate tax.
Now, the issue is sorting through wills written to maximize the old federal exemption from estate taxes — $3.5 million in 2009. In states with their own estate taxes, some of these provisions could distribute money and incur taxes in ways the deceased never expected — or maybe not if the federal estate tax is reinstated. As Jerry Weihs, director of advanced planning at Sun Life Financial, said: “We’re in a state of ambiguity.”
AUTOMATIC MISTAKES The biggest issue with the state estate taxes is wills that contain so-called formula clauses. Many wills were redrafted in the last decade to take into account the increasing federal estate tax exemption. Instead of rewriting the will every few years, clauses were put in to reflect the rising exemption amount.
Two commonly worded clauses for estates that left money in trusts could cause problems. “If the clause says you leave the applicable exclusion to your kids and the rest to a second spouse, that could now mean leaving nothing to your children since there is no applicable exclusion in 2010,” said Sharon Klein, head of wealth advisory at Lazard Wealth Management. “The other issue is if you leave the maximum that could pass free of federal tax to your children and the rest to a second wife, then it is skewed toward the kids, and the wife is disinherited.”
So far 12 states have introduced legislation to remedy this, but the proposals vary. New York, for example, looks at the intent of the will on Dec. 31, 2009, but this applies only if there is a surviving spouse. A formula clause that splits assets between nieces and charity will not function as intended. Florida’s solution could be even more contentious: it allows a judge to interpret the intent of the deceased, if a trustee or a beneficiary challenges the will.
UNEXPECTED TAXES A formula clause can also cause another costly problem. If it was written to send as much money as possible free of federal estate taxes to a credit shelter trust, the estate could pay an unexpected amount in state estate taxes.
That is because estate plans were often written so that the maximum amount that would not incur federal estate taxes would be passed to one set of heirs and the rest to a surviving spouse tax-free. In New York, which has a $1 million state exemption, the estate would have paid $229,200 in state estate taxes on the difference between the New York exemption level and the $3.5 million federal exemption.
Today, the entire estate could pass free of federal taxes. This could lead to an unexpectedly high state tax bill, said Stephen Akers, associate fiduciary counsel at Bessemer Trust. He said the tax on a $25 million estate in New York would be $3,466,800.
“In retrospect, it could be wise to pay that,” Mr. Akers said. “You might be able to avoid the federal estate tax on that much money.” But that is a big if, and it depends on whether Congress decides to make a new estate tax retroactive.
MARRIAGE PROBLEMS The absence of a federal estate tax also raises the question of whether an estate can finance a qualified terminal interest property (QTIP) trust. Such trusts hold assets left to a surviving spouse free of tax until the second spouse dies. The glitch is that a QTIP trust was typically selected when filing the federal estate tax return.
Mr. Akers said several states like Connecticut, Massachusetts and Pennsylvania have a state QTIP election and others are working on it.
In theory, people living in these states could end up far ahead of where they otherwise would have been, he said. If someone left his estate in a state QTIP trust, the surviving spouse would not have to pay estate taxes on it when she died. This is because the estate tax for the surviving spouse comes into play only if a marital deduction is allowed when the first spouse dies. Since there is no federal estate tax return to file, the marital deduction is not an option now.
Mr. Akers said this had not been tested, but it was a better option than leaving assets outright to a spouse, which would certainly be taxed when the spouse died.
Ms. Klein said she was advising clients to set up QTIP trusts, where allowed, as a hedge. By filing extensions to the estate tax returns, you could have up to 15 months to make the election, at which point the estate tax landscape should be clearer.
SNOWBIRD TRAP More jarring to retirees who escape to Florida in the winter may be a bill under debate in that state’s legislature. It proposes to tax property owned by non-Florida residents who are residents of states with state estate taxes.
This is a radical change for Florida, which has long enticed wealthy residents because it had no income or estate taxes. The proposal, on the surface, is a battle between states: Florida wants its cut of any estate tax collected by another state on Florida property. (As proposed, people who live in states without an estate tax will be exempt.) But where it would affect nonresidents is in the legal costs to make sure Florida gets its cut.
And there are also immediate costs of Congressional inaction: changing your will to reflect your state estate tax is not free. “There are going to be significant expenses for what may well be a temporary situation,” Mr. Weihs said.
By: Paul Sullivan
The New York Times
The first quarter is nearly over, and the federal government has made no move to reinstitute the estate tax. So dying today seems free, right?
There is just one problem: If you live in one of 20 states with a state estate tax, you could find your existing estate tax plans causing more harm than good.
State estate taxes are not new. They had just been a secondary element in the course of figuring out the much higher federal estate tax.
Now, the issue is sorting through wills written to maximize the old federal exemption from estate taxes — $3.5 million in 2009. In states with their own estate taxes, some of these provisions could distribute money and incur taxes in ways the deceased never expected — or maybe not if the federal estate tax is reinstated. As Jerry Weihs, director of advanced planning at Sun Life Financial, said: “We’re in a state of ambiguity.”
AUTOMATIC MISTAKES The biggest issue with the state estate taxes is wills that contain so-called formula clauses. Many wills were redrafted in the last decade to take into account the increasing federal estate tax exemption. Instead of rewriting the will every few years, clauses were put in to reflect the rising exemption amount.
Two commonly worded clauses for estates that left money in trusts could cause problems. “If the clause says you leave the applicable exclusion to your kids and the rest to a second spouse, that could now mean leaving nothing to your children since there is no applicable exclusion in 2010,” said Sharon Klein, head of wealth advisory at Lazard Wealth Management. “The other issue is if you leave the maximum that could pass free of federal tax to your children and the rest to a second wife, then it is skewed toward the kids, and the wife is disinherited.”
So far 12 states have introduced legislation to remedy this, but the proposals vary. New York, for example, looks at the intent of the will on Dec. 31, 2009, but this applies only if there is a surviving spouse. A formula clause that splits assets between nieces and charity will not function as intended. Florida’s solution could be even more contentious: it allows a judge to interpret the intent of the deceased, if a trustee or a beneficiary challenges the will.
UNEXPECTED TAXES A formula clause can also cause another costly problem. If it was written to send as much money as possible free of federal estate taxes to a credit shelter trust, the estate could pay an unexpected amount in state estate taxes.
That is because estate plans were often written so that the maximum amount that would not incur federal estate taxes would be passed to one set of heirs and the rest to a surviving spouse tax-free. In New York, which has a $1 million state exemption, the estate would have paid $229,200 in state estate taxes on the difference between the New York exemption level and the $3.5 million federal exemption.
Today, the entire estate could pass free of federal taxes. This could lead to an unexpectedly high state tax bill, said Stephen Akers, associate fiduciary counsel at Bessemer Trust. He said the tax on a $25 million estate in New York would be $3,466,800.
“In retrospect, it could be wise to pay that,” Mr. Akers said. “You might be able to avoid the federal estate tax on that much money.” But that is a big if, and it depends on whether Congress decides to make a new estate tax retroactive.
MARRIAGE PROBLEMS The absence of a federal estate tax also raises the question of whether an estate can finance a qualified terminal interest property (QTIP) trust. Such trusts hold assets left to a surviving spouse free of tax until the second spouse dies. The glitch is that a QTIP trust was typically selected when filing the federal estate tax return.
Mr. Akers said several states like Connecticut, Massachusetts and Pennsylvania have a state QTIP election and others are working on it.
In theory, people living in these states could end up far ahead of where they otherwise would have been, he said. If someone left his estate in a state QTIP trust, the surviving spouse would not have to pay estate taxes on it when she died. This is because the estate tax for the surviving spouse comes into play only if a marital deduction is allowed when the first spouse dies. Since there is no federal estate tax return to file, the marital deduction is not an option now.
Mr. Akers said this had not been tested, but it was a better option than leaving assets outright to a spouse, which would certainly be taxed when the spouse died.
Ms. Klein said she was advising clients to set up QTIP trusts, where allowed, as a hedge. By filing extensions to the estate tax returns, you could have up to 15 months to make the election, at which point the estate tax landscape should be clearer.
SNOWBIRD TRAP More jarring to retirees who escape to Florida in the winter may be a bill under debate in that state’s legislature. It proposes to tax property owned by non-Florida residents who are residents of states with state estate taxes.
This is a radical change for Florida, which has long enticed wealthy residents because it had no income or estate taxes. The proposal, on the surface, is a battle between states: Florida wants its cut of any estate tax collected by another state on Florida property. (As proposed, people who live in states without an estate tax will be exempt.) But where it would affect nonresidents is in the legal costs to make sure Florida gets its cut.
And there are also immediate costs of Congressional inaction: changing your will to reflect your state estate tax is not free. “There are going to be significant expenses for what may well be a temporary situation,” Mr. Weihs said.
Tuesday, March 9, 2010
Trying to Get Foxx's Estate Out of the Redd
Interesting story from one of my father's favorite actors. I thought you might enjoy. Shawn
By Steve Friess
LAS VEGAS (March 7) -- It could easily have been the plot for a "Sanford and Son" episode: a bizarre money-making scheme cooked up by a well-meaning but possibly misguided man that seems destined to go comically awry.
But in this real-life case, it's a county official in Las Vegas who is trying to put the life story of late "Sanford" star Redd Foxx on the block to resolve mammoth debt the actor left behind. Foxx owed more the $3.6 million in taxes to the IRS when he died 19 years ago.
The trouble is, it's not clear that such a thing can actually be sold or what its value might be.
When Cahill surveyed the outstanding cases after taking office in 2007, Foxx's name stood out. The performer was a longtime resident of Las Vegas, where he frequently performed stand-up comedy during his career. He died in 1991 at a Los Angeles hospital.
Cahill learned that Foxx's daughter, Debraca Foxx, had been removed in 2006 as the administrator of the actor's estate because she had failed to provide an accounting of revenue received in royalties, residuals and licensing deals since her father's death.
Foxx's fourth wife and widow, Ka Ho Foxx, has accused Debraca Foxx in court filings of pocketing money that should have gone toward paying down the tax debt. As a result of the family squabble, the probate court put the public administrator in charge of managing the estate and resolving the debts.
Since 2007, Cahill's office has aggressively pursued the case, according to public documents, collecting more than $101,000 owed to the estate. Payments include a $5,000 fee from CBS Studios for use of a video clip of Redd Foxx in an episode of "Everybody Hates Chris" and $3,000 from Hallmark for use of Foxx's image on a greeting card.
"The estate had no assets at all at that time, although we've been able to locate some assets, collect some royalties since then," Cahill said. "This was the big-ticket item, the rights to his story. That was an asset to be marketed."
So Cahill kept his efforts to sell the story quiet until last month, when his office issued an unusual press release announcing that it had received offers from $20,000 to $2 million and that Cahill had done lunch and taken meetings with Hollywood types.
A producer even brought along an actor interested in playing Foxx "who was in a popular TV series that had recently ended," Cahill said in an interview. He declined to disclose the actor's name but said the deal fell through, as has every other prospect.
"Who I'm waiting to call, the call that would make my day would be Jamie Foxx," Cahill said. "That would be great for so many reasons. There's the connection there." The Oscar-winning actor's professional name is an homage to Redd Foxx.
The deals may have failed because the concept of selling a life's story is one that doesn't exist, said intellectual property rights attorney Eric J. Goodman, a partner in the law firm of Burkhalter, Kessler, Goodman and George in Orange County. He regularly deals with celebrity cases.
Goodman said Nevada allows for the marketing of someone's "right of publicity," defined in the law as the ability to use a "name, voice, signature, photograph or likeness" of anyone for commercial purposes.
Among the exceptions, however, is "the use in connection to an original work of art" and the use "to portray, imitate, simulate or impersonate a person in a play, book, magazine article, newspaper article, musical composition, film, or a radio, television or other audio or visual program, except where the use is directly connected with commercial sponsorship."
"The issue for the administrator is if they're going to sell bobblehead dolls, great, that can be bequeathed to an estate," Goodman said. "But he's proposing the use of Redd Foxx's name for commercial use. A film is a piece of art. I think the administrator has good intentions and this is a very creative idea, but what he's selling is the Brooklyn Bridge here. Who's to say anybody else can't come along and sell their own biography of him?"
Travis Twitchell, a Las Vegas-based attorney hired by Cahill's office, reads the law differently. To him, the use of Foxx's name or portrayal in a movie would be a commercial endeavor.
But Twitchell's definition presents other problems -- namely that, in his view, a filmmaker could never tell Foxx's life story without participation from and possible compensation for other people in his life. Neither Cahill nor Twitchell can promise any prospective buyer that Foxx's survivors would go along -- thereby undermining the value of the rights.
Debraca Foxx remains under an unfilled court order to account for money received during her years as administrator. She could not be reached for comment. And an attorney for Ka Ho Foxx said she plans to object in court to Cahill's effort to market the rights.
As for Cahill, he plans to step out of the Hollywood arena. At an April court hearing, he expects a probate judge to approve a licensing deal with CMG Brands, a large Hollywood firm that licenses the image and material of dozens of stars.
He realized he was out of his depth, he said, when he dined with the unnamed producer and TV star. It was hardly glamorous, just a quiet meal at a suburban chain restaurant about 10 miles from the seemingly more appropriate setting of the Las Vegas Strip.
"We did joke around about who would play me," said Cahill, sort of a burly, Wilford Brimley-meets-Ed Asner type. "But how Hollywood does what they do is something of a mystery to me. We're about to find out."
By Steve Friess
LAS VEGAS (March 7) -- It could easily have been the plot for a "Sanford and Son" episode: a bizarre money-making scheme cooked up by a well-meaning but possibly misguided man that seems destined to go comically awry.
But in this real-life case, it's a county official in Las Vegas who is trying to put the life story of late "Sanford" star Redd Foxx on the block to resolve mammoth debt the actor left behind. Foxx owed more the $3.6 million in taxes to the IRS when he died 19 years ago.
The trouble is, it's not clear that such a thing can actually be sold or what its value might be.
When Cahill surveyed the outstanding cases after taking office in 2007, Foxx's name stood out. The performer was a longtime resident of Las Vegas, where he frequently performed stand-up comedy during his career. He died in 1991 at a Los Angeles hospital.
Cahill learned that Foxx's daughter, Debraca Foxx, had been removed in 2006 as the administrator of the actor's estate because she had failed to provide an accounting of revenue received in royalties, residuals and licensing deals since her father's death.
Foxx's fourth wife and widow, Ka Ho Foxx, has accused Debraca Foxx in court filings of pocketing money that should have gone toward paying down the tax debt. As a result of the family squabble, the probate court put the public administrator in charge of managing the estate and resolving the debts.
Since 2007, Cahill's office has aggressively pursued the case, according to public documents, collecting more than $101,000 owed to the estate. Payments include a $5,000 fee from CBS Studios for use of a video clip of Redd Foxx in an episode of "Everybody Hates Chris" and $3,000 from Hallmark for use of Foxx's image on a greeting card.
"The estate had no assets at all at that time, although we've been able to locate some assets, collect some royalties since then," Cahill said. "This was the big-ticket item, the rights to his story. That was an asset to be marketed."
So Cahill kept his efforts to sell the story quiet until last month, when his office issued an unusual press release announcing that it had received offers from $20,000 to $2 million and that Cahill had done lunch and taken meetings with Hollywood types.
A producer even brought along an actor interested in playing Foxx "who was in a popular TV series that had recently ended," Cahill said in an interview. He declined to disclose the actor's name but said the deal fell through, as has every other prospect.
"Who I'm waiting to call, the call that would make my day would be Jamie Foxx," Cahill said. "That would be great for so many reasons. There's the connection there." The Oscar-winning actor's professional name is an homage to Redd Foxx.
The deals may have failed because the concept of selling a life's story is one that doesn't exist, said intellectual property rights attorney Eric J. Goodman, a partner in the law firm of Burkhalter, Kessler, Goodman and George in Orange County. He regularly deals with celebrity cases.
Goodman said Nevada allows for the marketing of someone's "right of publicity," defined in the law as the ability to use a "name, voice, signature, photograph or likeness" of anyone for commercial purposes.
Among the exceptions, however, is "the use in connection to an original work of art" and the use "to portray, imitate, simulate or impersonate a person in a play, book, magazine article, newspaper article, musical composition, film, or a radio, television or other audio or visual program, except where the use is directly connected with commercial sponsorship."
"The issue for the administrator is if they're going to sell bobblehead dolls, great, that can be bequeathed to an estate," Goodman said. "But he's proposing the use of Redd Foxx's name for commercial use. A film is a piece of art. I think the administrator has good intentions and this is a very creative idea, but what he's selling is the Brooklyn Bridge here. Who's to say anybody else can't come along and sell their own biography of him?"
Travis Twitchell, a Las Vegas-based attorney hired by Cahill's office, reads the law differently. To him, the use of Foxx's name or portrayal in a movie would be a commercial endeavor.
But Twitchell's definition presents other problems -- namely that, in his view, a filmmaker could never tell Foxx's life story without participation from and possible compensation for other people in his life. Neither Cahill nor Twitchell can promise any prospective buyer that Foxx's survivors would go along -- thereby undermining the value of the rights.
Debraca Foxx remains under an unfilled court order to account for money received during her years as administrator. She could not be reached for comment. And an attorney for Ka Ho Foxx said she plans to object in court to Cahill's effort to market the rights.
As for Cahill, he plans to step out of the Hollywood arena. At an April court hearing, he expects a probate judge to approve a licensing deal with CMG Brands, a large Hollywood firm that licenses the image and material of dozens of stars.
He realized he was out of his depth, he said, when he dined with the unnamed producer and TV star. It was hardly glamorous, just a quiet meal at a suburban chain restaurant about 10 miles from the seemingly more appropriate setting of the Las Vegas Strip.
"We did joke around about who would play me," said Cahill, sort of a burly, Wilford Brimley-meets-Ed Asner type. "But how Hollywood does what they do is something of a mystery to me. We're about to find out."
Saturday, February 6, 2010
IRS Silent So Far On New US Tax Rules For Inherited Wealth
Our trusts are drafted in such a way to account for the change, but still going to be an interesting time figuring it all out.
By Martin Vaughan, Of DOW JONES NEWSWIRES
WASHINGTON -(Dow Jones)- The U.S. Internal Revenue Service is taking a wait- and-see approach on issuing guidance dealing with taxes on inherited wealth, unsure whether Congress will act in the next several months to change the rules again.
Advisers to the wealthy say they are left without a roadmap on a number of issues related to the disposition of assets left behind by those who have died since Jan. 1. In particular, they are looking to IRS for rules on how a new capital gains-tax regime that took effect this year will apply to estates.
"There are no forms that give us any idea how or what we are supposed to report," said Stephen Litman, an estate planner at the Minneapolis law firm of Leonard, Street and Deinard. "This leads to significant administrative challenges for families."
Congress is weighing whether to set permanent rules for taxing estates, and whether to make those rules retroactive to the beginning of this year, but such action is weeks, and maybe even months, away.
The 2001 tax-cut law was aimed at gradually eliminating estate taxes, but repeal proponents at the time lacked the congressional majorities needed to do so permanently.
As a result, the federal estate tax was repealed for 2010 only, and is scheduled to return in 2011 at rates similar to those in effect prior to President George W. Bush's tax cut legislation.
In place of the estate tax for 2010 is a capital gains tax that is levied when assets are sold. Heirs would have to pay capital gains taxes on the full appreciation in value of the asset from the time it was acquired by the deceased benefactor, a concept known in tax circles as "carryover basis."
That means that families have an additional step of searching records to establish the basis value of the asset, which was unnecessary when estate taxes were in place.
"Carryover basis rules have added another level of complexity," said Carol Kroch, head of wealth and financial planning at Wilmington Trust Corp. "Families will have to go through a more difficult process of valuing assets."
The 2010 law provides that heirs can get a "step-up" in basis, meaning no capital gains taxes would be due if the asset is immediately sold, for up to $ 1.3 million of the estate property. Surviving spouses can get a step-up in basis for an additional $3 million in property.
Families will have to decide which assets to protect from capital gains taxes with the basis step-up. For example, property that is to be sold in the near future might be a good candidate, to avoid an immediate tax consequence. It might also be wise to protect property that has been in the family for a long time, and therefore has a low basis, wealth advisors say.
All that said, Congress might pass legislation that reinstates the estate tax for 2010 and eliminates the carry-over basis rules, which would make all such planning moot.
That may explain why IRS for now is waiting for the legislative picture to come into focus.
"We are currently looking at the issues involved to determine the best course of action," said IRS spokesman Bruce Friedland.
Families generally have nine months from the death of the estate owner to file estate tax returns, so there is a little breathing room before they have to make decisions about how to allocate assets.
"I don't think anyone would be distributing assets yet," said Kroch. "Over time, estate executors will have to make a decision about how much to hold in reserve for the estate tax" in case Congress re-imposes it retroactively, she said.
Another option that is getting some discussion by congressional staff is an election that would allow the family members of people who died between Jan. 1, 2010 and when new legislation takes effect to choose between paying estate taxes, for example at the rates in effect in 2009, or the capital gains-tax regime under the current law.
By Martin Vaughan, Of DOW JONES NEWSWIRES
WASHINGTON -(Dow Jones)- The U.S. Internal Revenue Service is taking a wait- and-see approach on issuing guidance dealing with taxes on inherited wealth, unsure whether Congress will act in the next several months to change the rules again.
Advisers to the wealthy say they are left without a roadmap on a number of issues related to the disposition of assets left behind by those who have died since Jan. 1. In particular, they are looking to IRS for rules on how a new capital gains-tax regime that took effect this year will apply to estates.
"There are no forms that give us any idea how or what we are supposed to report," said Stephen Litman, an estate planner at the Minneapolis law firm of Leonard, Street and Deinard. "This leads to significant administrative challenges for families."
Congress is weighing whether to set permanent rules for taxing estates, and whether to make those rules retroactive to the beginning of this year, but such action is weeks, and maybe even months, away.
The 2001 tax-cut law was aimed at gradually eliminating estate taxes, but repeal proponents at the time lacked the congressional majorities needed to do so permanently.
As a result, the federal estate tax was repealed for 2010 only, and is scheduled to return in 2011 at rates similar to those in effect prior to President George W. Bush's tax cut legislation.
In place of the estate tax for 2010 is a capital gains tax that is levied when assets are sold. Heirs would have to pay capital gains taxes on the full appreciation in value of the asset from the time it was acquired by the deceased benefactor, a concept known in tax circles as "carryover basis."
That means that families have an additional step of searching records to establish the basis value of the asset, which was unnecessary when estate taxes were in place.
"Carryover basis rules have added another level of complexity," said Carol Kroch, head of wealth and financial planning at Wilmington Trust Corp. "Families will have to go through a more difficult process of valuing assets."
The 2010 law provides that heirs can get a "step-up" in basis, meaning no capital gains taxes would be due if the asset is immediately sold, for up to $ 1.3 million of the estate property. Surviving spouses can get a step-up in basis for an additional $3 million in property.
Families will have to decide which assets to protect from capital gains taxes with the basis step-up. For example, property that is to be sold in the near future might be a good candidate, to avoid an immediate tax consequence. It might also be wise to protect property that has been in the family for a long time, and therefore has a low basis, wealth advisors say.
All that said, Congress might pass legislation that reinstates the estate tax for 2010 and eliminates the carry-over basis rules, which would make all such planning moot.
That may explain why IRS for now is waiting for the legislative picture to come into focus.
"We are currently looking at the issues involved to determine the best course of action," said IRS spokesman Bruce Friedland.
Families generally have nine months from the death of the estate owner to file estate tax returns, so there is a little breathing room before they have to make decisions about how to allocate assets.
"I don't think anyone would be distributing assets yet," said Kroch. "Over time, estate executors will have to make a decision about how much to hold in reserve for the estate tax" in case Congress re-imposes it retroactively, she said.
Another option that is getting some discussion by congressional staff is an election that would allow the family members of people who died between Jan. 1, 2010 and when new legislation takes effect to choose between paying estate taxes, for example at the rates in effect in 2009, or the capital gains-tax regime under the current law.
Friday, December 18, 2009
Estate tax repeal seen bringing chaos
By Kim Dixon
WASHINGTON (Reuters) - The scheduled expiration of the tax on wealthy estates in the United States, unthinkable just days ago, has whipped the wealthy and their estate planners into a flurry of confusion over the changes to the controversial tax.
Under a quirk in the law, beginning on January 1 there will be a one-year repeal of a 45 percent tax on the value of estates over $3.5 million for individuals and $7 million for families.
"I'm going to be fending calls from people saying, 'Should I keep mom plugged in?'" said Carol Harrington, head of the private client group at law firm McDermott Will & Emery. "This is a disaster even if you are in favor of repeal."
Now, those who die on December 31 will pay the tax, while those who die a day later will not. In addition, the law's expiration unleashes a slew of changes, including for capital gains treatment of estates.
And because of the same quirky 2001 law that repeals the tax for a year, the estate tax is due to spring back to life in 2011 at a higher rate of 55 percent rate, which would be levied on estates with a value over $1 million for individuals.
The conventional wisdom had been that the Democrat-controlled Congress would pass an extension of current law. But opposition from Republicans to the tax and a U.S. Senate mired in a partisan health-care debate has prevented that from happening.
Once the current estate tax expires on December 31, those inheriting states will have to pay capital gains taxes on any assets sold based on the original price paid for the asset, after an exemption for the first $1.3 million in capital gains.
That is changed from the current law, which uses the market value of an asset at the time the estate is inherited as the basis for calculating capital gains on any future sale.
This will mean higher taxes for as many as 70,000 taxpayers, according to House Democrats, many more than will be impacted by elimination of the estate tax itself.
Tax experts say that the change will create a major problem because of the paperwork needed to establish the original investment price. Without documentation, the original basis goes to zero, meaning that the full sale price would be taxable after $1.3 million.
"Many people don't keep records," said Brenda Schafer, manager of tax analysis at the Tax Institute at H&R Block. "It's not like we can go back in time and get those records."
The estates of about a quarter of 1 percent of Americans would be subject to the estate tax under an earlier bill introduced by Democrats to extend it permanently, according to the Brookings Institution-Urban Institute Tax Policy Center.
CONSTITUTIONALITY OF A FIX
An aide to Senate Finance Committee Chairman Max Baucus said Baucus still holds out hope for an 11th-hour extension of the current tax, though most analysts are dubious.
"I am stunned that the Democrats, who have professed undying support for estate taxation all these years, have been in power for now this time, and not enacted" an extension," said Bill Ahern, policy and communications director at the conservative Tax Policy Foundation, which backs a repeal of the estate tax.
The tax has divided some Democrats, with conservatives from the party teaming with Republicans to propose a lower tax with a greater exemption level.
The battle will likely begin anew next year. Baucus said he will aim to retroactively reenact the tax at current levels, a policy backed by most Democrats.
But Clint Stretch, a former legislative counsel to the joint congressional committee on taxation, said there is a debate about the constitutionality of such a fix.
"Since scholars are divided in their opinions on whether the Constitution allows Congress to retroactively reimpose those taxes, litigation will result," he predicted.
And the politics are complicated by the reinstatement of the tax at a higher rate in 2011.
Progressive groups such as the Citizens for Tax Justice see this as the silver lining of a one-year repeal.
The specter of higher rates has led traditional opponents of the tax, such as the Chamber of Commerce and small business groups, to back a permanent extension of current policy.
WASHINGTON (Reuters) - The scheduled expiration of the tax on wealthy estates in the United States, unthinkable just days ago, has whipped the wealthy and their estate planners into a flurry of confusion over the changes to the controversial tax.
Under a quirk in the law, beginning on January 1 there will be a one-year repeal of a 45 percent tax on the value of estates over $3.5 million for individuals and $7 million for families.
"I'm going to be fending calls from people saying, 'Should I keep mom plugged in?'" said Carol Harrington, head of the private client group at law firm McDermott Will & Emery. "This is a disaster even if you are in favor of repeal."
Now, those who die on December 31 will pay the tax, while those who die a day later will not. In addition, the law's expiration unleashes a slew of changes, including for capital gains treatment of estates.
And because of the same quirky 2001 law that repeals the tax for a year, the estate tax is due to spring back to life in 2011 at a higher rate of 55 percent rate, which would be levied on estates with a value over $1 million for individuals.
The conventional wisdom had been that the Democrat-controlled Congress would pass an extension of current law. But opposition from Republicans to the tax and a U.S. Senate mired in a partisan health-care debate has prevented that from happening.
Once the current estate tax expires on December 31, those inheriting states will have to pay capital gains taxes on any assets sold based on the original price paid for the asset, after an exemption for the first $1.3 million in capital gains.
That is changed from the current law, which uses the market value of an asset at the time the estate is inherited as the basis for calculating capital gains on any future sale.
This will mean higher taxes for as many as 70,000 taxpayers, according to House Democrats, many more than will be impacted by elimination of the estate tax itself.
Tax experts say that the change will create a major problem because of the paperwork needed to establish the original investment price. Without documentation, the original basis goes to zero, meaning that the full sale price would be taxable after $1.3 million.
"Many people don't keep records," said Brenda Schafer, manager of tax analysis at the Tax Institute at H&R Block. "It's not like we can go back in time and get those records."
The estates of about a quarter of 1 percent of Americans would be subject to the estate tax under an earlier bill introduced by Democrats to extend it permanently, according to the Brookings Institution-Urban Institute Tax Policy Center.
CONSTITUTIONALITY OF A FIX
An aide to Senate Finance Committee Chairman Max Baucus said Baucus still holds out hope for an 11th-hour extension of the current tax, though most analysts are dubious.
"I am stunned that the Democrats, who have professed undying support for estate taxation all these years, have been in power for now this time, and not enacted" an extension," said Bill Ahern, policy and communications director at the conservative Tax Policy Foundation, which backs a repeal of the estate tax.
The tax has divided some Democrats, with conservatives from the party teaming with Republicans to propose a lower tax with a greater exemption level.
The battle will likely begin anew next year. Baucus said he will aim to retroactively reenact the tax at current levels, a policy backed by most Democrats.
But Clint Stretch, a former legislative counsel to the joint congressional committee on taxation, said there is a debate about the constitutionality of such a fix.
"Since scholars are divided in their opinions on whether the Constitution allows Congress to retroactively reimpose those taxes, litigation will result," he predicted.
And the politics are complicated by the reinstatement of the tax at a higher rate in 2011.
Progressive groups such as the Citizens for Tax Justice see this as the silver lining of a one-year repeal.
The specter of higher rates has led traditional opponents of the tax, such as the Chamber of Commerce and small business groups, to back a permanent extension of current policy.
Wednesday, December 16, 2009
Baucus to Try Next Year to Extend Estate Tax Retroactively
Washington Post
December 16, 2009
WASHINGTON -- Senate Finance Committee Chairman Max Baucus (D., Mont.) said he will try early next year to pass legislation ensuring no lapse in the estate tax, after Republicans blocked another effort to extend the tax for a three-month period.
Democrats had sought to extend the tax at its current, 2009 levels, but it now appears likely the tax will be repealed as scheduled Jan. 1. Mr. Baucus said he will try to move legislation early in 2010 that ensures that there won't be a window where wealthy estate owners who die will escape the tax.
"We clearly will work to do this retroactively, so that when the law is changed, it will have retroactive application," Mr. Baucus said on the Senate floor Wednesday.
Mr. Baucus sought unanimous consent from the Senate for a two-month extension of the tax, warning that allowing the tax to be repealed pending congressional action would create unnecessary confusion.
But Republicans said the repeal should be allowed to take effect, as provided under current law. "The problem doesn't have to exist if they'll just leave the existing law alone, and let the rate go to zero, where everyone wants it anyway," said Sen. Jon Kyl (R., Ariz.).
In 2009, estate wealth above $3.5 million, or $7 million for married couples, is taxed at a 45% rate. The estate tax will disappear in 2010, replaced by a capital-gains tax paid when heirs sell inherited assets. Then in 2011, unless Congress acts, the estate tax will return to tax estates above $1 million, or $2 million for couples, at a 55% rate.
Mr. Baucus called that a "yo-yo effect."
"It's so irresponsible to further the yo-yo effect by allowing current law to expire, and create this massive confusion," he said.
December 16, 2009
WASHINGTON -- Senate Finance Committee Chairman Max Baucus (D., Mont.) said he will try early next year to pass legislation ensuring no lapse in the estate tax, after Republicans blocked another effort to extend the tax for a three-month period.
Democrats had sought to extend the tax at its current, 2009 levels, but it now appears likely the tax will be repealed as scheduled Jan. 1. Mr. Baucus said he will try to move legislation early in 2010 that ensures that there won't be a window where wealthy estate owners who die will escape the tax.
"We clearly will work to do this retroactively, so that when the law is changed, it will have retroactive application," Mr. Baucus said on the Senate floor Wednesday.
Mr. Baucus sought unanimous consent from the Senate for a two-month extension of the tax, warning that allowing the tax to be repealed pending congressional action would create unnecessary confusion.
But Republicans said the repeal should be allowed to take effect, as provided under current law. "The problem doesn't have to exist if they'll just leave the existing law alone, and let the rate go to zero, where everyone wants it anyway," said Sen. Jon Kyl (R., Ariz.).
In 2009, estate wealth above $3.5 million, or $7 million for married couples, is taxed at a 45% rate. The estate tax will disappear in 2010, replaced by a capital-gains tax paid when heirs sell inherited assets. Then in 2011, unless Congress acts, the estate tax will return to tax estates above $1 million, or $2 million for couples, at a 55% rate.
Mr. Baucus called that a "yo-yo effect."
"It's so irresponsible to further the yo-yo effect by allowing current law to expire, and create this massive confusion," he said.
Monday, December 7, 2009
House votes to make estate tax permanent
By Kim Dixon
December 3, 2009
WASHINGTON (Reuters) - The U.S. House of Representatives passed a permanent extension of the federal estate tax on Thursday, but the measure, which taxes estates at rate of 45 percent after exempting the first $3.5 million, is likely to be changed in the Senate.
The current tax is due to expire on December 31 but return in 2011, when it will exempt just the first $1 million of an estate while taxing the remainder at a rate of 55 percent.
Keeping the current rate would cost the government $234 billion of revenue over 10 years, according to a congressional tax committee.
The bill passed 225 to 200, drawing all its support from Democrats.
"The estate tax is critical to prevent a permanent aristocracy from arising in this country," said Jared Polis, a Colorado Democrat who said, as one of the wealthiest members of the House, he would pay the tax under the bill.
Republicans blasted the bill and called for complete repeal of the tax. "Death in and of itself should not be a taxable event," said Dave Camp, a Michigan Republican.
Preserving the 45 percent rate and the $3.5 million exemption indefinitely will be much harder in the U.S. Senate because of the cost. In addition, Senate lawmakers are consumed by the healthcare reform bill debate, which could continue into January.
Given the price tag, the bill is "pretty much a non-starter" in the Senate, analyst Anne Mathias at Concept Capital said.
A likely compromise in the Senate is a one-year extension of current law, which would raise some money because of the 2010 phase out.
The estates of about a quarter of one percent of Americans would be subject to the tax under the House bill, according to the Brookings Institution-Urban Institute Tax Policy Center.
The non-partisan Congressional Budget Office reported in 2005 that fewer than 2 percent of all estates have had to pay estate taxes in recent years.
Republicans warned Democrats would suffer at the ballot box if they extend the tax, citing Americans' general dislike of any new taxes.
Democrats countered by citing prominent estate tax proponents, including investors George Soros and Warren Buffett, who has argued the tax helps keep America a meritocracy.
BUSINESS GROUPS SPLIT
Business groups are divided on the legislation.
The Chamber of Commerce has long called for the abolition of the estate tax, although recently said it was willing to back a continuation of the current law.
"The uncertain nature of the estate tax regime over the next two years is a major concern for business, many of which are struggling in this current economic downturn," Bruce Josten, a lobbyist for the Chamber, said in a letter to lawmakers on Wednesday backing the Democrat's bill.
The National Association of Manufacturers urged rejection of the bill, saying its members pay tens of thousands of dollars in fees for estate planning.
CAPITAL GAINS RELIEF
The House bill contains capital gains tax relief for those inheriting estates by repealing so-called carry-over basis rules.
With no action, those inheriting estates after December 31 will have to calculate capital gains taxes based on the original price paid for the property.
"People will be stuck with large tax bills forcing liquidation if they were forced to pay a capital gains tax on a 1959 basis," said Polis, the Colorado lawmaker. "Do opponents truly believe making families pay capital gains is better?"
The American Farm Bureau, the nation's largest agricultural group representing all sizes of farms, opposes any estate tax but backs the portion of the bill that repeals the cost basis rules. The group had no data on how many of its members would be impacted by the tax.
(Editing by Steve Orlofsky and Tim Dobbyn)
December 3, 2009
WASHINGTON (Reuters) - The U.S. House of Representatives passed a permanent extension of the federal estate tax on Thursday, but the measure, which taxes estates at rate of 45 percent after exempting the first $3.5 million, is likely to be changed in the Senate.
The current tax is due to expire on December 31 but return in 2011, when it will exempt just the first $1 million of an estate while taxing the remainder at a rate of 55 percent.
Keeping the current rate would cost the government $234 billion of revenue over 10 years, according to a congressional tax committee.
The bill passed 225 to 200, drawing all its support from Democrats.
"The estate tax is critical to prevent a permanent aristocracy from arising in this country," said Jared Polis, a Colorado Democrat who said, as one of the wealthiest members of the House, he would pay the tax under the bill.
Republicans blasted the bill and called for complete repeal of the tax. "Death in and of itself should not be a taxable event," said Dave Camp, a Michigan Republican.
Preserving the 45 percent rate and the $3.5 million exemption indefinitely will be much harder in the U.S. Senate because of the cost. In addition, Senate lawmakers are consumed by the healthcare reform bill debate, which could continue into January.
Given the price tag, the bill is "pretty much a non-starter" in the Senate, analyst Anne Mathias at Concept Capital said.
A likely compromise in the Senate is a one-year extension of current law, which would raise some money because of the 2010 phase out.
The estates of about a quarter of one percent of Americans would be subject to the tax under the House bill, according to the Brookings Institution-Urban Institute Tax Policy Center.
The non-partisan Congressional Budget Office reported in 2005 that fewer than 2 percent of all estates have had to pay estate taxes in recent years.
Republicans warned Democrats would suffer at the ballot box if they extend the tax, citing Americans' general dislike of any new taxes.
Democrats countered by citing prominent estate tax proponents, including investors George Soros and Warren Buffett, who has argued the tax helps keep America a meritocracy.
BUSINESS GROUPS SPLIT
Business groups are divided on the legislation.
The Chamber of Commerce has long called for the abolition of the estate tax, although recently said it was willing to back a continuation of the current law.
"The uncertain nature of the estate tax regime over the next two years is a major concern for business, many of which are struggling in this current economic downturn," Bruce Josten, a lobbyist for the Chamber, said in a letter to lawmakers on Wednesday backing the Democrat's bill.
The National Association of Manufacturers urged rejection of the bill, saying its members pay tens of thousands of dollars in fees for estate planning.
CAPITAL GAINS RELIEF
The House bill contains capital gains tax relief for those inheriting estates by repealing so-called carry-over basis rules.
With no action, those inheriting estates after December 31 will have to calculate capital gains taxes based on the original price paid for the property.
"People will be stuck with large tax bills forcing liquidation if they were forced to pay a capital gains tax on a 1959 basis," said Polis, the Colorado lawmaker. "Do opponents truly believe making families pay capital gains is better?"
The American Farm Bureau, the nation's largest agricultural group representing all sizes of farms, opposes any estate tax but backs the portion of the bill that repeals the cost basis rules. The group had no data on how many of its members would be impacted by the tax.
(Editing by Steve Orlofsky and Tim Dobbyn)
Tuesday, October 27, 2009
Estate Tax Update
WASHINGTON -- House Majority Leader Steny Hoyer (D., Md.) said Tuesday he supports a move to permanently fix the estate tax at 2009 levels and expects it will be adopted by Congress before the end of the year.
The staff on the tax-writing Ways & Means Committee is working on legislation that would set the rate of the tax at current levels.
The House legislation would continue the 2009 estate tax parameters indefinitely. It would exempt estate wealth under $3.5 million, or up to $7 million for a married couple, and tax inheritances above that amount at 45%.
If Congress does nothing, the estate tax would be repealed for one year in 2010. It would then snap back in 2011 to levels not seen since before President George W. Bush signed landmark tax legislation in 2001. That rate would only allow a $1 million exemption and charge any income over that amount with a 55% levy.
The extension would cost the taxpayer $233 billion over the next decade, because currently the federal budget assumes the rate will increase sharply from 2011.
The House measure would attach language requiring implementation of pay-as-you-go budget rules for most other mandatory spending. The Senate opposes this effort, which could set up an end-of-year battle between House and Senate lawmakers.
Some lawmakers are advocating a more generous exemption, lifting the threshold to $5 million for individuals and lowering the effective rate charged to 35%.
Write to Corey Boles at corey.boles@dowjones.com and Martin Vaughan at martin.vaughan@dowjones.com
The staff on the tax-writing Ways & Means Committee is working on legislation that would set the rate of the tax at current levels.
The House legislation would continue the 2009 estate tax parameters indefinitely. It would exempt estate wealth under $3.5 million, or up to $7 million for a married couple, and tax inheritances above that amount at 45%.
If Congress does nothing, the estate tax would be repealed for one year in 2010. It would then snap back in 2011 to levels not seen since before President George W. Bush signed landmark tax legislation in 2001. That rate would only allow a $1 million exemption and charge any income over that amount with a 55% levy.
The extension would cost the taxpayer $233 billion over the next decade, because currently the federal budget assumes the rate will increase sharply from 2011.
The House measure would attach language requiring implementation of pay-as-you-go budget rules for most other mandatory spending. The Senate opposes this effort, which could set up an end-of-year battle between House and Senate lawmakers.
Some lawmakers are advocating a more generous exemption, lifting the threshold to $5 million for individuals and lowering the effective rate charged to 35%.
Write to Corey Boles at corey.boles@dowjones.com and Martin Vaughan at martin.vaughan@dowjones.com
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