Federal Estate Tax – Is a Prediction Fulfilled?
Last year, on September 15, 2008 with the presidential election almost two months away, I predicted that, whether McCain or Obama won the White House, the result for Federal Estate taxes would be the same and the result. See www.collitonlaw.com 9/15/2008.
Last week the U.S. House of Representatives passed the bill that I predicted. The Pomeroy bill, H.R. 4154, the Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Act of 2009, would permanently freeze the Estate Tax where it now stands. We await results from the Senate but I have a prediction there also which I will share at the conclusion of this column.
Here is the story and why I am confident in both predictions.
In 2001 Congress passed the current law, the Economic Growth and Tax Relief Reconciliation Act or EGTRRA with a complex system of exemptions depending on year of death. If you could predict the year when you would die, you would have a fair notion of whether your surviving heirs would pay Federal Estate tax and about how much. Spouses are not affected since they have an unlimited exemption.
If the year of death was last year, 2008, for instance, as long as the estate was less than $2 million, your heirs would not owe the tax. This year the Unified Credit is $3.5 million. There is a $1 million exemption on lifetime gifts.
Since not so long ago estates totaling $650,000 or more were taxed, the increase of the exempted amount to $3.5 million is huge. In fact, with the present $3.5 million Unified Credit, it is predicted that only .25% of Americans dying would be affected. That is one-quarter of one percent. With some tax planning, especially for married couples leaving assets to their heirs or for family businesses that use family limited partnerships and similar mechanisms, the amount can be extended much further. Entire industries have grown up around tax saving strategies with names like GRUTs, GRATs, QPRTs, and ILITS.
Under the EGTRRA plan, the next step after the $3.5 million Unified Credit would be one year, 2010, when the Federal Estate tax would “abate” or go away. After that, in 2011 the tax would go back to a Unified Credit of $1 million and a maximum tax rate of 55%.
In other words, and this is significant, in exchange for the 2010 one year “free ride” with no federal estate tax, the tax would return with a vengeance affecting many more Americans in 2011.
The year 2010 under EGTRRA would have its own problems also. In that year changes in capital gains tax rules for heirs who receive appreciated property would be revamped so that there would no longer be what is known as a “step up in basis” at death. Although there are credits and exemptions, the bottom line is that some heirs might not pay estate taxes in 2010 but could pay capital gains taxes instead.
What 2010 would look like comparing the Pomeroy bill (H.R. 4154) and EGTRRA. Pomeroy would freeze Federal Estate taxes as they are today which, frankly speaking at a $3.5 million exemption ($7 million if spouses use some minor tax planning) and step up in basis at death for capital gains purposes, is not too bad.
Advocates of elimination of the “death tax” would want elimination of the tax not only for 2010 but indefinitely. If so, they will need to cope with capital gains tax rules if they want to succeed. This is why.
As things stand now Americans, generally speaking, are better off inheriting property than they are earning it. If a parent buys stock for $10 a share and then sells it for $300, he pays capital gains taxes on the $290 difference. If he buys stock at $10 a share and his heirs inherit it at $300 a share and sell immediately, they do not pay capital gains taxes. The same is true of other appreciated assets.
If step-up in basis at death is eliminated as it would be under EGTRRA, the heir would owe taxes. EGTRRA considers this by allowing a step-up of up to $1.3 million plus $3 million for assets left to a spouse but the issue is still there.
A Prediction – Federal Estate tax. With war in Afghanistan, health care reform and a full docket, the chances are good that the U.S. Senate will kick the ball down the block for another year. When the dust settles I predict that our current 2009 Federal Estate tax system and rates will be extended for another year until Congress is able to work out the details.
About the Author Janet Colliton
Esquire, Colliton Law Associates, P.C. Janet Colliton has practiced law for over 38 years, 37 of them in Chester County, Pennsylvania, a suburb of Philadelphia. Her practice, Colliton Law Associates, PC, is limited to elder law, Medicaid, including advice, applications and appeals, and other benefits planning including Veterans benefits, life care and special needs planning, guardianships, retirement, and estate planning and administration.