Legal News

Another Possible Solution to Estate Tax Problem

By Brian Harris

Very recent discussions in Washington have resulted in a proposal that resolves the estate tax issue and avoids litigation on constitutionality.

Congress is expected to reenact the estate tax at some point, although the exact date is unclear.  Some commentators have suggested that no action may be taken in all of 2010, which would result, under the law enacted in 2001, in a return to a graduated tax system with rates up to 55 percent and a $1 million exemption.

But here is a proposal that is being discussed by some Democrats in D.C.: The estate tax would be reenacted through 2011 with a 45 percent rate and a $3.5 million exemption.  But for those who died between Jan. 1, 2010, and the date the new law is passed, there would be a choice: You could be taxed under the reenacted law (45 percent, $3.5 million) or you could pay no estate tax and have carryover basis for the assets owned by the decedent; that is, there would be no step-up in basis at death.  Thus, for those decedents, there could be a determination of which taxation method produces less tax and less complexity.

That idea seems to avoid the possibility of litigation challenging the retroactive enactment of the estate tax.  If the tax is simply reenacted in a few weeks, retroactive to Jan. 1, there is sure to be litigation challenging its constitutionality, and the outcome is not clear.  Further, such litigation could drag on for years, resulting in uncertainty as to how estates are to be administered for a long period of time.  The option technique permits decedents? representatives to choose how to be taxed, so they would have nothing to complain about.

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

Full post as published by The Legal Intelligencer Blog on January 26, 2010 (boomark / email).