Legal News

Let?s Take Grandpa on a Roller Coaster

By Brian Harris

Some fun, eh, Grandpa? Grandpa?

We are now within a few months of the effective date of perhaps the craziest tax scheme ever passed by Congress (although there are many competitors for that title).  Beginning Jan.1, 2010, there will be no federal estate tax due with respect to decedents dying on or after that date, until the end of the year.  Then, when 2011 arrives, the tax is reinstated, but the exemption falls back to $1 million and the maximum rate rises to 55 percent.  So, under the current tax scheme, people who die next year will, in some sense, be performing a selfless financial act for their families.  Or, as suggested by the title, they might be encouraged.

It sounds funny, but that?s the method of taxation passed by the Congress and signed by the president in 2001.  Everyone assumed that the law would be changed long before 2010, but that date is fast approaching.  All that needs to happen for this bizarre tax situation to come into effect is that the Congress does nothing.  And, as we have seen, that?s one of their specialties.

Numerous proposals have been made to remedy this situation.  Those proposals include: reducing the exemption to $2 million for an indefinite period; increasing the exemption to $5 million; allowing a surviving spouse to use any portion of the exemption not used at the first death; and re-unifying the estate and gift taxes, so that people could give away the full amount of the estate tax exemption during life, rather than being limited to $1 million.  The president has recommended making the $3.5 million exemption and 45 percent rate apply for 2010 and future years.

It?s still very likely that the law will be changed by Dec. 31.  In the meantime, the only sensible planning assumption can be that the tax will remain in effect, and probably with the exemption and rate now in effect.  But, while we?re waiting to see what happens, this is an ideal time to do lifetime planning.  Interest rates used by the IRS in valuing various kinds of transfers remain low, and asset values have also remained at low levels.  For those interested in transferring homes or businesses, this is the time to act.

Robert H. Louis
Saul Ewing
http://saul.com

Full post as published by The Legal Intelligencer Blog on September 14, 2009 (boomark / email).