The alternative minimum tax isn't the only tax that will continue to surprise taxpayers if Congress fails to act on its repeal. The estate tax, currently set to expire in 2010, will return with a vengeance to a full 55 percent in 2011 if Congress does nothing.The Joint Committee on Taxation estimated that in 2009 there will be 9,600 estates subject to the estate tax. While that number falls to zero in 2010, it will jump to nearly 62,000 in 2011, with increases every year thereafter.

The temporary nature of the estate tax repeal provisions results in additional complexity and confusion for small businesses, and adds to planning costs, say observers.

In fact, one third of small business owners today said that their family will have to sell or liquidate part of their business to pay estate taxes, according to the National Association of Manufacturers. Half of those who liquidate to pay the estate tax will need to eliminate 30 or more jobs. "It's a huge issue for our members," said Dena Battle, director of tax policy at the NAM.

In recent hearings, both Senate Finance Committee chair Max Baucus, D-Mont., and ranking member Chuck Grassley, R-Iowa, came out in favor of permanent repeal. "The estate tax is complicated and intimidating," said Baucus. "It needs serious reform. And I support repeal."

"There is something fundamentally wrong when the government swoops in after a funeral to take a cut of what that person had worked their whole life for, and has already paid taxes on at least once," Grassley said. "Any monetary benefit obtained by any individual is ether taxed or not taxed for a very specific reason. As long as a person has accumulated an estate in accordance with the law, the government should not be able to profit from that person's death."

Estate planning attorney Conrad Teitell, testifying before the committee, noted the increased need for planning. "We have complex tax laws because those laws reflect our complex society," said Teitell, who is with the Stamford, Conn., office of Cummings & Lockwood LLC. "However, it's not the complexity that presents the problem with the current estate tax rules, but rather the uncertainty."

While the conventional wisdom is that the changes to the estate tax scheduled to occur in 2010 and 2011 are unlikely to occur, estate planners must assume that they will.

Eugene Sukup, the founder and chairman of Iowa-based Sukup Manufacturing Co., told the committee that the estate tax discourages entrepreneurs and destroys family businesses, while jeopardizing the jobs of his employees in seven states.

Sukup designed a new type of grain bin 44 years ago, and today holds over 70 U.S. patents, and produces a broad line of grain-handling and storage systems. "If Sukup closed today, 350 people would lose their jobs. But that's just the beginning," he said. "Without jobs, there's no reason for a child care center. As people move on to other places, the restaurants and stores close down, the dentist moves to a bigger city with more customers."

Although Sukup is a growing and profitable company, its greatest threat - the estate tax - could cause it to close permanently, he said. "If my wife Mary and I died today, we estimate that our estate tax liability would be somewhere between $15 and $20 million. The only way for my sons to pay that tax would be to sell off the business. Even if my sons are able to somehow keep the business after we pass on, my grandchildren will have to pay the same tax again when they take over the company. There's no limit to how many times our company will be taxed," he said.

The estate tax is flawed because its nine-month due date forces survivors to liquidate assets in economically poor circumstances, according to Grassley. "Instead of the free market determining when assets are bought or sold, the death tax makes that determination. As most people are not privy to the exact date they will hand over half of everything they owe to the government, the death tax is fundamentally not fair," he said.

The NAM's Battle noted that the association supported a compromise effort in the Senate last year that would have lowered the rate to 15 percent for estates under $25 million and would have increased the exemption to $10 million per couple. "It was a step in the right direction," she said.


A repeal of the estate tax in its purest form would mean there would be no stepped-up basis for the heirs, according to E. Martin Davidoff, a Dayton, N.J.-based CPA and tax attorney. "This would hurt 98 percent of heirs. What needs to happen is to have the estate tax exemption increased to a level of $5 to $10 million dollars, so you exclude everyone but the mega-rich."

Michael K. Feinberg, a partner in the tax, trust and estates department of the Woodbridge, N.J.-based law firm of Greenbaum Rowe Smith & Davis LLP, agreed. "The trade-off is that unless they incorporate exceptions, if there is no estate tax, the assets will pass to the heirs with a carryover basis which will increase their capital gains when the property is ultimately sold, even in situations where the heirs may not have paid an estate tax because they were underneath the exemption," he said. "While the estate tax affects relatively few decedents, the potential increase in capital gains tax affects everyone."

Feinberg noted that a potential repeal of the estate tax has consequences on the estate's obligation to the state, due to the linkage between most state inheritance taxes and the federal estate tax. "Under the current scheme, any payment of state death taxes is a deduction against the federal estate tax, which means that for larger estates your payment of state death taxes is partially subsidized," he said.

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