Although I wasnt born with a silver spoon in my mouth, and I would have to get very lucky very soon to be concerned with the estate tax rate, it has always seemed an unfair proposition to tax a person or business when it is most vulnerable.
Assets that have already been taxed at least once are taxed again. If the assets are tied up in a small business or farm, heirs are often forced to sell the underlying asset in order to pay taxes. Naturally, this results in the closing of businesses and a damper on economic prosperity.
Moreover, activity and resources spent on avoiding the estate tax could better be spent making the business prosper. And it is evident that the prospect of the tax discourages saving and encourages selfish expenditures. While it cannot reduced to a measurable statistic, it is clear that entrepreneurs, faced with the likelihood that they will be unable to pass on a thriving business to their heirs, instead engage in die-broke behavior.
Although the estate tax is slated to disappear in 2010 and reappear in 2011, the just-issued Estate Tax Form 706 for 2009 makes no mention of the scheduled repeal. In fact, Congress is working hard to repeal the repeal. Hearings in the House last week discussed a number of options, including the Estate Tax Relief Act of 2009, H.R. 3905, which phases in the estate tax exemption levels over 10 years to $5 million while also decreasing the tax rate to 35 percent.
Terry Neese, representing the National Center for Policy Analysis and a small business owner herself, observed that the estate tax today exists almost exclusively for redistributive purposes, since the revenue yield is miniscule. Neese, who testified at the hearing, observed that if the estate tax were abolished, most bequests would still be subject to capital gains taxation when assets are sold, thereby generating offsetting revenue increases.
We spend between $5,000 and $7,500 a year in estate tax planning when those dollars could be spent hiring additional staff, purchasing more equipment, using dollars in marketing, building the business and creating more jobs, she said. Its even more onerous now. You need to die in 2010, because if you dont, the rate will go up to either 35 or 55 percent.
The Senate has suggested the rate should be 35 percent, she added. The House is still out on this. When the chair [of the House Small Business Committee Nydia Velazquez] asked me what I thought was the magic percent, I said the magic number is zero. She said, Well, we have deficits. It cant be zero. But there are a number of studies that show that the increased growth in the economy would more than offset any loss of revenue.
While the best solution is a full and permanent repeal of the estate tax, proposed H.R. 3905 was welcomed by Meredith Mayes, the owner of a commercial printing business. This approach is one our industry would welcome and support, though a higher starting exemption level and a shortened time-frame would provide more practical relief, she said.
They keep lobbing bills forward, said estate planning expert Steven G. Chill, CPA, Esq., of New York-based Golenbock Eiseman Assor Bell & Peskoe LLP. The question is whether well see legislation before the end of the year.
The conventional wisdom is that if they pass it sometime during 2010, theyll just make it retroactive, he added. The estate tax return for the lucky guy who dies on Jan. 1, 2010 wont be due until Oct. 1, 2010, so theyll have time to get at his estate. Whatever they pass will put more money in the fisc. The bad news is that come 2010, there will be no step-up in basis, but thats not relevant until the decedents assets are sold.
Because the final form of any legislation is unclear, planning is uncertain, according to Chill.
Clearly, people cant plan to die, he said. One thing we are advising clients is that if they are contemplating a gift and paying a gift tax, to maybe hold off on that. One of the items for discussion is not whether there will be an estate tax, but whether there will be a reunification of the estate and gift tax exemption. Right now the exemptions are different three and a half million [dollars] for the estate tax and one million for the gift tax. The hope is that the legislation will bring the gift tax exemption up to parity with the estate tax, so you can give away the same amount during your lifetime or at death.
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