Accountants are squarely on the front line of the problems with the 2010 estate tax hiatus, according to practitioners and estate-planning attorneys.
"They are advising clients today on such issues as whether an income tax deduction is available for gifts to a charitable remainder trust, whether gifts to grandchildren are subject to the [generation-skipping transfer] tax, and whether gifts to trusts for grandchildren will be subject to the GST tax when they make distributions after 2010," said Howard Zaritsky, a consultant and estate planning attorney. "There are no perfect answers to any of these questions, but there definitely are wrong answers."
The estate tax, which expired at the beginning of the year, may or may not be resurrected before the end of 2010, and it may or may not be resurrected retroactively. If nothing is done, 2011 will bring a return to the pre-2001 estate tax regime, bringing with it a return to stepped-up basis. But the uncertainty surrounding its possible return has wreaked havoc with those engaged in advising clients about their life situation.
Accountants with the worst problems are those advising executors of decedents who die this year, Zaritsky explained. "They have to be preparing to file both carryover basis and estate tax returns, depending upon what Congress does. They have to figure out whether to start raising cash to pay estate taxes, or to refrain from selling assets that might have a potential capital gains tax liability."
"The only things we really know are that the gift tax rate is only 35 percent this year, there is no estate tax on estates of decedents who die this year, and there is no GST tax on generation-skipping transfers made this year," he said.
He added that planners can't even be sure about those, because Congress is still talking about possible retroactive changes. "Clients who want to make transfers to grandchildren should absolutely do it this year," advised Zaritsky, who also authored Practical Estate Planning in 2010. "But they should also absolutely do it by a formula transfer that minimizes the risk of a tax being imposed if Congress retroactively reinstates the GST tax."
AICPA, ABA WEIGH IN
Meanwhile, both the American Institute of CPAs and the American Bar Association Section of Taxation have urged Congress to correct the current state of federal estate, gift and GST taxes. In recent letters to lawmakers, both bodies stressed the uncertainty affecting taxpayers and their advisors. "The expiration of the estate and generation-skipping transfer taxes at the end of 2009 and the imposition of the carryover basis rules are causing tremendous uncertainty for taxpayers and their advisers," the AICPA said.
A huge concern is whether or not carryover basis will apply to the assets left surviving spouses and family members, according to Eileen Sherr, tax senior technical manager at the AICPA. "People are dying every day, and they need to know whether they should sell certain assets or not, what records they need to keep, and will any potential fix be retroactive," she said. "Also, do they need to revise their wills and trusts? If someone were to die, their will may carry out their desires the way the law is right now, but it may not be that way a month from now. So they don't know whether to change the will or not."
"You feel you have to do something for clients in the unlikely event one of them were to die this year," agreed Lawrence Peck, a New York-based estate attorney. "One of the issues is whether your estate will go to the right beneficiaries, because, for example, the credit shelter trust and marital bequest are drafted using formulas that are geared to the federal estate tax. Now you have to look at wills to see how the formula would operate if there is no federal estate tax."
QUESTIONS ABOUT GIFT TAX RATE
A big uncertainty is the gift tax rate, noted Sherr. "We don't know if it will stay at its lower rate [35 percent] or move back to the higher rate [45 percent]."
In fact, the potential increase in the gift tax rate could present a planning opportunity, if it were more certain, according to Peck.
"To the extent you want to incur a gift tax, this would be the year to do it, assuming no retroactive installation of the system back to January 1," he explained. "That's one of the problems of trying to plan, because we don't know if there will be any action this year, and if there is, we don't know if it will be retroactive to January 1. And the longer we go through 2010 the more likely it is that any action will not be retroactive to January 1."
Someone who receives assets from a decedent this year is faced with practical issues, said Gordon F. Spoor, of St. Petersburg, Fla.-based Spoor & Associates PA and chair of the AICPA's Trust, Estate and Gift Tax Technical Resource Panel. "The distribution isn't taxable under the old law currently in force, but that could change," he said. "And no one can tell him his basis in the assets if he wishes to sell. For years, planners have been relying on the transfer tax rules and documents have all been drawn assuming the existence of the estate tax. Now that there is none, those documents can produce unintended consequences. For example, a married person leaves a maximum amount that can pass free of estate tax in a bypass trust, and the balance outright to the spouse. If the person dies this year, the maximum amount that can pass free of estate tax is everything, so you've basically disinherited your spouse."
Roby Sawyers, a professor in the Department of Accounting at North Carolina State University and chair of the AICPA Transfer Tax Reform Task Force, said that the amount of uncertainty for compliance as well as planning is unprecedented: "For the heirs of those who died in the first four months of the year, we can't advise the estate what its tax liability is, nor can we tell the heirs whether the assets will be valued with a carryover basis or not."
"Five years ago there were jokes about no client dying on Dec. 31, 2009, and numerous deaths in December 2010, just to indicate the absurdity of the situation. Unfortunately, it doesn't seem so absurd now. You can expect that on Dec. 31, 2010, there will be a very wealthy individual on life support, and someone will trip on the cord," he said.
Though there are numerous legislative "fixes" currently before Congress that would restore the 2009 rates, it is uncertain that any will pass, predicted Sherr. "It's uncertain whether or not they will act this year, and it's certainly possible that they will let the whole year go by and do nothing," she said.
"There just doesn't seem to be the political will to act right now," agreed Spoor.
The ABA Tax Section noted that the changes under the Economic Growth and Tax Relief Reconciliation Act of 2001 created dilemmas in the interpretation and administration of the tax law that are uncommonly difficult because, unlike most income tax changes, it is a suspension of two entire tax systems, not just a temporary change in the rules affecting those tax systems, and it affects taxes that are applied on a continuous basis, not tied to transactions or calendar years.
"For many of the taxpayers who are subject to estate tax, planning in 2010 has either stopped because no one knows what to do, or is proceeding frantically to cover all possible outcomes," it stated.
At press time, the ABA Tax Section sent a second, separate letter to the Senate Finance Committee requesting hearings on the issues presented by changes in federal wealth transfer taxes.
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