For at least the first few days of 2010, and probably longer, executors of the estates of people dying after Dec. 31, 2009, will be operating in a difficult environment after the Senate’s failure to extend the estate tax at its current rates.

The Senate is unlikely to act on legislation to extend the estate tax at 2009 levels before the end of the year because Democrats are divided over the terms of an extension and most Republicans oppose the tax, according to a report by CCH.

“For several years, most people have assumed that some sort of ‘fix’ to the estate tax that would avoid outright repeal but would also restrict the tax to relatively large estates would be enacted by the end of this year,” said CCH senior estate planning analyst Bruno Graziano. “Instead, if nothing is done, we’ll get outright repeal for 2010 and then a significant increase in the present tax in 2011.”

If Congress takes no action before the end of 2009, the following major changes will be made to the current transfer tax regime:

•    Estate and generation-skipping transfer (GST) taxes will be repealed for 2010;

•    Gift tax will be retained with a top rate of 35 percent and an exclusion amount of $1 million;

•    The stepped-up basis at death rules will be repealed and replaced with modified carryover basis. The recipient of the bequeathed property will receive a basis equal to the lesser of the adjusted basis of the property in the hands of the decedent, or the fair market value of the property on the date of the decedent’s death;

•    Executors will be able to increase the basis of estate property by up to $1.3 million, or $3 million in the case of property passing to a surviving spouse. Thus, an estate will be allowed to increase the basis of property transferred to a surviving spouse by as much as $4.3 million. However, the basis of an asset cannot be adjusted above its fair market value at the date of the decedent’s death; and,

•    Executors of estates will also be required to report certain details relating to transfers at death of non-cash assets in excess of $1.3 million and appreciated property received by the decedent within three years of death for which a gift tax return was required to be filed.

House lawmakers had previously approved the Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Bill of 2009 (H.R. 4154) by a vote of 225 to 200 on December 3. That measure would have capped the tax at its current rate, with a $3.5 million exclusion.

However, the Senate had several major problems with the bill, mainly its failure to allow for inflation adjustments and the use of H.R. 2920, the Statutory Pay-As-You-Go Bill of 2009, to fund the legislation.

Short-term Extensions Fail

Democratic leaders in both houses had initially planned to attach a short-term extension to the Department of Defense appropriations bill (H.R. 3326). However, they abandoned that plan when it became clear that the Senate did not have the 60 votes needed to pass the legislation.

In what appeared to be a last-ditch effort, Senate Finance Committee Chairman Max Baucus, D-Mont., attempted on Dec. 16 to pass a three-month extension at current levels by unanimous consent (see Estate Tax to Temporarily Expire Until Next Year).

“It would be irresponsible to further the yo-yo effect by allowing current law to expire and create all this massive confusion, this chaos that will apply to heirs of the estates on January 1 because of this change in capital assets from step-up to a carryover basis, among other things,” Baucus said, appearing before the Senate.

The Republicans objected to the move, making unanimous consent impossible.
Under current law, the estate and the GST taxes expire at the end of 2009. Lawmakers have said they will revisit the tax early in 2010 and will likely approve retroactive provisions. However, the application of the estate tax retroactively could face constitutional challenges in court.

In addition, if no action is taken by Congress in 2010, the estate and GST taxes will come back into force in 2011.The estate and gift tax applicable exclusion amounts would be reunified at $1 million, and the top marginal tax rate would be 55 percent. 

“The impasse concerning the estate tax will have an immediate impact on executors who find themselves administering the estates of decedents dying after December 31, 2009,” Graziano noted. “Due to the immediate effective date of the modified carryover basis regime, executors will be faced with an additional level of complexity with respect to decisions on selling or holding appreciated assets if the total appreciation exceeds $1.3 million. The sooner Congress makes its intent clear, the better for everyone.”


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