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Monday, February 15, 2010

Stewart Welch - Estate Tax Ouija Board Game

In a late 2009 article in The Birmingham News, I predicted that Congress would extend the 2009 estate tax rules rather than allow the scheduled repeal of all estate taxes to take effect. I was wrong…maybe. It’s true that Congress failed to take any action which means that currently there are no estate taxes no matter what size your estate. This means that if Donald Trump and his wife died this year instead of receiving potentially hundreds of millions of dollars in estate taxes, the federal government would receive nothing and his heirs would receive the entire estate tax free! Maybe…maybe not. There is discussion on Capital Hill suggesting Congress will change the law later this year and make it retroactive to January 1, 2010. If this were to occur, you can bet someone will challenge it on constitutional grounds. Resolution would likely take years and eventually be settled by the Supreme Court.

To put the current law in perspective, the estate tax laws for 2009 exempted up to $3.5 million from estate taxes for individuals and with proper planning, a married couple could exclude up to $7 million. In addition, estate beneficiaries received a ‘stepped-up’ tax basis on inherited assets, meaning the market value of all estate assets was re-set based on the date of death, eliminating capital gains taxes on immediate sales and eliminating the need for record-keeping on tax basis. Under the 2010 law, up to $1.3 million of assets receive a stepped-up basis’ while the excess amount is subject to capital gains taxes at the time of sale. Certain spousal transfers receive an additional $3 million of stepped-up basis.

Should Congress fail to take action this year, the current estate tax law is automatically repealed and on January 1, 2011 the estate tax exemption would revert to $1 million causing millions of middle-class Americans to be subject to taxes they never anticipated.

If you feel like you’re locked in a dark room seeking answers from a Ouija board, you’re in good company. Congressional inaction has made it almost impossible to make effective plans and doing nothing could create disastrous results for your family. For example, many wills use a ‘formula’ stating the maximum exemption amount goes to a by-pass trust (that often has children as the beneficiaries) with the balance going outright to the spouse. For this year that means that all of the money would go to the family trust, potentially leaving the spouse out entirely!

With all of this uncertainty, what exactly should you do? Your best choice is to contact your attorney or financial advisor and review your current estate plan to determine if you could potentially be adversely affected. Second, consider writing your congressional representative and demand that he or she bring permanent resolution to this matter. This is what we pay them to do and it’s time they did their job. For a sample letter, visit the Resource Center at www.welchgroup.com; click on ‘Links’; then click on Estate Tax Letter to Congress. There’s also a link to the email address of your congressional representative.

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