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What to Do While Estate Tax Is in Limbo

January 26, 2010

Congress’s unexpected failure to fix the estate tax is putting estate planners in an uncomfortable position.

The estate tax has currently gone away for this year, but will be back next year at a rate of 55 percent on estates over $1 million. At a panel discussion Tuesday at the New York State Society of CPAs’ Foundation for Accounting Education, the panelists seemed to agree that Congress is likely to act before the end of the year, but exactly when is uncertain, and whether the tax would apply retroactively to people who die in 2010.

“If Congress decides to enact legislation, will it be retroactive?” asked Laurence Keiser, a partner in the New York law firm Stern Keiser Panken & Wohl. “If so, I’m sure somebody will die whose name will be changed to plaintiff.”

He expects to see many more taxpayers affected by the carryover basis concept than were ever subject to the estate tax, but he believes a retroactive change by Congress would withstand a court challenge, as there has been precedent in past court cases for retroactive tax law changes.

Bernard Rappaport, a tax partner at the accounting firm Anchin, recommended a variety of strategies, including a provision in the will about the carryover basis as there can be disagreements between the IRS and the state probate courts over assets. “The estate tax wasn’t repealed,” he said. “It was put in hibernation. You have to be careful how it’s phrased in the will.”

He recommended that people add a codicil to their wills specifying how their estates should be treated under current tax law, and how their estate would be treated if an estate tax were enacted again. However, the complications are many, and it’s difficult to predict in what form the estate tax will re-emerge.

He said that executors should receive explicit instructions on what to do about the carryover basis. Rappaport also recommended the use of Qualified Terminable Interest Property, or QTIP, trusts for spouses. In these trusts, the surviving spouse receives income from the trust’s assets for life, but the trust’s principal is left to somebody else, typically the children. He noted that the generation-skipping tax has also gone away. Another strategy can involve gifting assets as the gift tax rate is now 35 percent.

“It’s very unfair because the government can retroactively change things and it will probably stand, but we’re stuck,” he said. “We have to do something. We have to plan.”

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