Legal News

It?s a Holiday Miracle

By Brian Harris

Congress has fallen below even the lowest expectations of tax practitioners.  It?s like a (bad) dream come true.

For the past eight years, I?ve been describing our estate tax system to clients: We?ll have gradually lowering rates, and the exemption will eventually rise to $3.5 million.  Then, if you can believe it, there will be one year, 2010, when the tax will disappear.  The next year, the tax will reappear, at the higher rates and lower exemption that existed before the law was changed.  Then, I would explain that Congress would of course have to fix the law because that made no sense.  We would laugh, and I would send them a bill.

But time passed and the law wasn?t fixed.  Congress flirted with repeal of the estate tax, but never reached that point.  It was assumed that they would do something to avoid this strange sequence of tax law changes, which originated in artificial budget constraints.  There was some continued grumbling about repeal, mostly from people trying to get the attention of wealthy donors.  Earlier in this month, it appeared that there would be a one-year extension of the current law ($3.5 million exemption, 45 percent tax rate), then maybe an extension of a few months.  Now, the effort to extend the law has been abandoned for the year, and the estate tax is scheduled to be reduced to zero in 2010. 

Leaders in Congress promise that the law will be changed early in the year.  But that means that the law would have to be amended retroactively to the first of the year.  Otherwise, the lucky people who die in the first week (or actually their families) would have a windfall for no particular reason.  Congress has the power to pass tax laws on a retroactive basis, at least back to the beginning of the year, but every time this happens, there are lawsuits, and we can expect those again, but it?s likely that a retroactive change would be upheld.

The absence of an estate tax in 2010 has another consequence.  Under the current law, when someone dies, his or her assets are stepped up in basis to their date of death value, which is a valuable tax benefit.  Without an estate tax, assets won?t be stepped up.  Instead, those who inherit will carry over the basis the decedent had, which will add to the complexity of the tax law administration and increase tax liabilities on the heirs, in many cases more than the estate tax would have done.  When carryover basis was added to the law in the 1970s, it was so complicated that it had to be repealed.  Let?s hope that a new year will bring a resolution of this problem.

Robert H. Louis

Full post as published by The Legal Intelligencer Blog on December 22, 2009 (boomark / email).