Estate-Tax Repeal Leaves Many Unknowns
Originally published: 04.01.10 by Mike Coyne
Business owners should consider pitfalls and special circumstances before reviewing estate plans.
You have probably read thatthe federal estate tax lawwas repealed effective Jan. 1,2010. But you might be surprisedto know that it is not necessarilygood news for everyone. Because of somequirks in the law, families owning businessesor having a net worth of $4 millionto $5 million could be hurt by therepeal. Additionally, the repeal is onlytemporary, and there is talk in Congressof retroactively repealing the repeal!We are not encouraging our clientsto have their estate plans reviewed orrewritten at this time. Given the currentuncertainty, a review or rewrite will — inmost cases — be of limited value. Thereare, however, certain circumstances thatmight require immediate attention.To understand the circumstancesthat might cause problems, you need tohave an understanding of the currentstate of the law. Until mid-December,most of us expected that we would endup with a permanent extension of the2009 version of the federal estate taxlaw, which would protect the first $3.5million worth of assets and provide aflat 45% tax rate on everything abovethat amount. In early December, theHouse of Representatives acted to passa permanent $3.5 million estate taxexemption. During late December,the Senate, which was mired in thehealthcare debate, never addressed theestate
Why Uncertainty Is a Problem
For married couples, the traditionalapproach to estate planning is to fund afamily trust at the time of the first deathwith an amount equal to the amountthat the deceased person can pass tohis or her heirs estate tax-free. All otherproperty is left to the surviving spouse.In 2010, because there is no estate tax,the traditional approach would providefor everything being left to the familytrust, and nothing left to the survivingspouse. However, this itself is nota problem, since typically the survivingspouse is also a beneficiary of the family trust.
Here is the problem:
Assume that aperson dies early in 2010, and all of hisor her assets are transferred into the family trust. If Congress retroactivelyreinstates the estate tax for 2010, a potentiallylarge amount of assets in the family trust could be subject to estatetax.Why not leave all of your property toyour surviving spouse? If you believe, aswe do, that the federal estate tax law willbe reinstated in some fashion, then leaving everything to the surviving spouseis poor estate planning. It will simplymean the surviving spouse’s taxable estatewill likely be larger at the time of thesurviving spouse’s death. This could resultin an estate tax that could have beenavoided.The other big problem with the repealof the federal estate tax is that the“step up in basis” rule has been repealed.Under the old law, if a person’s heirs soldinherited property, they paid incometax on only any increase in the value ofthe property from the date of death ofthe person who left them the property.Under repeal, if an heir sells inherited property, he or she must pay income taxon any increase in the value of propertyfrom the date the property was acquiredby the decedent.For example, assume one of your relativesleaves you 1,000 shares of a publiccompany that she purchased in 1960 fora price of $20,000. Today, the stock isworth $600,000. Under the old law, ifyou sold the stock for $600,000, youwould pay no income tax. Under currentlaw, you will have to pay $87,000([$600,000 - $20,000] x 15% capitalgains tax rate) in income tax, assumingthat you have evidence that the stockwas purchased for $20,000. If you donot know the original purchase priceof the stock, you must assume the valuewas $0 and pay income tax of $90,000.We believe that the repeal of the “stepup in basis” rule could be particularlydifficult on family-owned businesses.Additionally, it means that taxes willbe payable with respect to small estateswhere no taxes were payable under theold law.
Situations That May Need Immediate Attention
If you are in poor health or, for someother reason, are acutely concernedabout your estate plan, you should meetwith your lawyer. Additionally, if youhave special family circumstances, suchas children from a prior marriage, heirswith special needs, or any unusual familyproblems that you think need to beaddressed, you should have your estateplan reviewed.Making GiftsNote that although the federal estatetax has been repealed in 2010 (unlessCongress re-imposes them by new legislationthis year), the federal gift tax remainsin place in 2010 with a $1,000,000lifetime exemption. However, the gifttax rate has been decreased to 35%, insteadof 45% as in 2009. The $13,000annual per-person gift tax exclusion isstill available in 2010.
Michael P. Coyne is a founding partner ofthe law firm, Waldheger Coyne, located inCleveland, Ohio. For more information onthe firm, visit: www.healthlaw.comor call 440-835-0600.
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