Leiha Macauley, a Boston-based lawyer, is handling a complicated estate tax case that includes a 93-year-old widow, her children, grandchildren and an estate worth about $20 million.
CONGRESS is coming back next week, but no one is hazarding a guess as to how lawmakers will handle the issue of estate and income taxes.
How are you dealing with the uncertainty of tax rates next year?
Last year, every tax adviser was confident that Congress would devise some fix to the estate tax before the year was over. When that did not happen, advisers predicted that a fix would come early this year. Then they said it would happen this summer. But the fix never came, and the estate tax lapsed this year.
Now, in the midst of a flurry of tax proposals, not to mention the Republican gains in the midterm elections, legislators have only five weeks to act on the estate tax before the holiday recess. And taxes â?? both the estate tax and the income tax â?? are far from the only issues on Congressâ??s agenda.
Few tax planners and lawyers are willing to speculate on what will happen in the last months of 2010. They learned their lesson last year. But Alfred Peguero, a personal finance partner at PricewaterhouseCoopers, said his firm believed the weeks of Dec. 6 and 13 offered the best window for a decision on the estate tax.
If Congress does not act, the estate tax will revert to its 2001 level â?? a 55 percent tax rate for individual estates larger than $1 million. This will force seven times the number of estates to file estate tax returns next year as in 2009, when the individual exemption was $3.5 million and the rate was 45 percent, according to a report from the Tax Policy Center, a Washington research group. The group said 108,000 estates would have to file returns under the lower exemption and 44,000 would pay tax, compared with 15,000 estate tax returns in 2009 with 5,500 owing tax.
There are few concrete solutions to planning for something as uncertain as the time of death and Congressional action on taxes. But several accountants, lawyers and financial advisers offered a few suggestions on things to do before year-end. All carry risks.
ESTATE TAX A year with no estate tax has led to a lot of macabre jokes about ending the life of an elderly relative. And much was made of two billionaires â?? George Steinbrenner and Dan Duncan â?? who died this year and whose estates will presumably go untaxed.
But the absence of an estate tax for just one year and the lack of guidance from the Internal Revenue Service on how to handle other death-related taxes that could be owed this year has created another problem. Assets do not get valued at the date of a personâ??s death, as they would with an estate tax. Instead, heirs have to calculate the assetsâ?? appreciated value and pay capital gains tax on that amount.
There are provisions in the tax code to give people a limited amount of relief from taxes on capital gains. But the process is onerous and so far the I.R.S. has released only a draft version of Form 8939, which will be needed to file those taxes in April.
Leiha Macauley, a partner in the individual clients group at Day Pitney, a law firm in Boston, has an even more complicated problem. In May, a client died with an estate worth some $20 million, which he had left to his wife through a simple will. His widow, however, is 93.
Lawyers have drawn up the paperwork that would allow her to disclaim her husbandâ??s property. It would then pass estate tax-free to her children. But they are waiting to file the paperwork to make sure she lives to the end of the year.
They want to make sure there is no retroactive estate tax, which her children would then have to pay. Also, her husband left gifts of $500,000 to each of their grandchildren, all minors. There is no generation-skipping transfer tax this year, though there had been one until last year. But putting the gifts in a trust, as would normally have happened, could subject them to taxes if the grandchildren eventually withdrew the money and such a tax had been reinstated.
The only upside is how the widow is handling the predicament. â??She has a great sense of humor,â? Ms. Macauley said. â??She said she only wants to have enough to live on, furnish her one-bedroom apartment and pay for her driver.â?
Whatever happens to her, there are far more people of modest means who may have to confront the planning process in 2011 or risk paying an unexpected estate tax.
And affluent people may be shocked by the costs to minimize the portion of their estate over $1 million for an individual or $2 million for a couple.
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