Congress May Impose Retroactive Estate Tax

Congress May Impose Retroactive Estate Tax

February 10th, 2010

There is currently no tax on the estates of those dying during 2010. Although Congress may reinstate the tax retroactively in 2010, perhaps as part of broader tax reform, this is by no means a certainty.

If Congress fails to act, a few thousand very wealthy families will have reason to celebrate, while tens of thousands of taxpayers of more modest means will pay capital gains on inherited assets — and executors will face additional and confusing administrative burdens. And if Congress does change the law retroactively, extensive litigation over inheritances is almost guaranteed.

Congress has had nine years to prevent this from happening but hasn’t been able to. Under the provisions of a Bush-era tax-cut bill enacted in 2001, the value of estates exempt from the tax has been gradually raised over the past eight years while the tax rate on estates has been reduced, so that in 2009 only an individual estate worth $3.5 million or more is taxed, at a rate of 45 percent. For the year 2010, according to the 2001 law, the estate tax disappears entirely, only to be restored in 2011 at a rate of 55 percent on estates of $1 million or more, which is where things stood before the 2001 change.

Loss of Step-Up Means Step Down for Many Taxpayers

The catch for taxpayers of more modest means, however, is that for 2010 the estate tax is replaced with a 15 percent capital gains tax on inherited assets that are later sold. Normally someone inheriting property at an individual’s death gets a “step-up in basis” in the property. That is, the value of the property for determining capital gains tax due is calculated at the time it is inherited, not when it was originally bought.

But the law eliminating the estate tax in 2010 also largely does away with the basis step-up rules. This means that those inheriting estates will have to pay capital gains taxes on any assets sold based on the original price paid for the asset, after an exemption for the first $1.3 million in capital gains (plus $3 million for assets transferred to a surviving spouse).

Let’s say your father dies and leaves you a home worth $1.5 million and a $500,000 portfolio of stocks purchased at various times over the past 40 years. If you decided to sell any of these assets, you’d normally pay little or no capital gains tax on the sales. The new provisions mean that you have to calculate capital gains based on the value of the home and the stocks when your father bought them, not when you inherited them. That could be very expensive, not to mention time-consuming in trying to ascertain the original price your father paid for everything.

“If we do not extend our estate tax law, all taxpayers, all heirs will be subject to massive, massive confusion in trying to determine the value of their underlying asset,” Senate Finance Committee Chairman Max Baucus (D-MT) said on the Senate floor.

The chief tax counsel for the House Ways and Means Committee estimates that while extending the 2009 estate tax law would affect about 6,000 estates, 71,400 estates could face new capital gains taxes if the estate tax disappears. According to the Center on Budget and Policy Priorities, “at least 62,500 of these are estates that would not owe any estate tax if the 2009 rules were continued and that thus would be adversely affected by estate tax repeal. Farm and business estates would constitute a disproportionately large share of this group.” Small farms and businesses are the groups whose interests opponents of the estate tax have claimed they are defending.

Couples With Credit Shelter Trusts at Risk

The new world of no estate tax places at particular risk couples who have so-called “credit shelter” or “bypass” trusts that are designed to allow both spouses to take advantage of their respective estate tax exemptions. These are common arrangements used in estate planning for married couples. With the estate tax gone, the wording of these trusts could be interpreted as completely bypassing the surviving spouse when the first spouse dies, meaning a surviving spouse would get nothing without the expensive process of claiming her “elective share.” For explanations of all this, click here and here. Married couples with such trusts should consult their attorney.

The House passed a bill in early December permanently extending the 2009 estate tax rules, which will bring in an estimated $25 billion for 2009 by imposing the 45 percent rate on estates over $3.5 million (or $7 million for a couple). The Senate’s Democratic leadership wanted to pass a similar bill and put it on President Obama’s desk before the estate tax expired at the end of 2009, but they were blocked by united Senate Republicans who prefer a lower tax rate of 35 percent and a higher exclusion amount of $5 million ($10 million for couples).

The Perils of Going Retroactive

Sen. Baucus has pledged to try to restore the estate tax retroactively in 2010. This would undo the capital gains increase, but it could also create fertile ground for lawsuits by those whose family members die between January 1, 2010, and the date when any retroactive law is enacted.

“I can guarantee this: if they succeed in getting retroactive in hiking the death tax from zero to 45 percent, there are going to be lawsuits,” said Dick Patten, president of the American Family Business Foundation, which opposes the estate tax. “Its going to be messy, its going to be noisy.” (For an excellent discussion by Forbes.com of the mess that a lapse in the estate tax could create, click here. “Beneficiaries will deal with uncertainty for years,” warns one tax expert.)

In a 1994 decision, the U.S. Supreme Court ruled that the Constitution’s ban on the enactment of ex-post facto laws doesn’t apply to tax legislation, provided the retroactive application is “supported by a legitimate legislative purpose furthered by rational means”. United States v. Carlton, 512 U.S. 26 (1994). Since most estates don’t file tax returns until about nine months after someone dies, if Congress can come to an agreement quickly in 2010 the problems caused by a retroactive law may be limited. But Bloomberg.com notes that “The pressure to reach agreement may breathe new life into” the Republicans’ “compromise proposal” of a 35 percent tax on couples’ estates worth more than $10 million.

Client Newsletter June 25th 2009

I have some fantastic news to share with you:

On May 24, 2009, I got married to Diedre Wachbrit (now, Braverman). I truly could never imagine finding a more compatible and lovely partner. I first met Diedre when she was instructing an estate planning course that I took a few years back. Coincidentally? Diedre is also an estate planning attorney. I hope that you will have the opportunity to meet her sometime in the near future!

This email is also the first installment of an informational series, regarding relevant estate planning topics --

Funding your Living Trust, why is it important?

Many of you have created Living Trust based plans with my Firm (if you are not sure whether your estate plan includes a Living Trust, please contact me to review your estate plan, at no cost).

In order for your Living Trust plan to meet your estate planning goals, it is critical that your assets be titled in the name of your Living Trust. Avoiding probate, management of your assets in the event of incapacity and maintaining privacy, are just some of the goals of a Living Trust plan.

The process of transferring the title of your assets into your Living Trust, is called “Funding.” Your Living Trust can only control the property that is actually in the Living Trust. That is why Funding is so important! Your Living Trust cannot begin to work for you, until you transfer your assets to it.

The Integral Role of Funding

I am keenly aware that the worst impression that you can have, is that your funding process is languishing in my office. You may find yourself somewhere on a continuum between your Living Trust being completely funded through having made no progress towards the funding of your Living Trust at all.

My experience has provided the following insights regarding Living Trust Funding

*The Funding of your Living Trust is a collaborative process between you and my office, with each party playing a vital role.

*No matter how diligent my office may be, there are steps in the funding process, that I cannot take on your behalf. For example, some documents must be signed elsewhere, such as needing Medallion Signature Guarantees. Also, brokerage firms generally have questions about the features of your account that must be answered by you, etc.

*The duration of the funding process depends a great deal upon the number and types of assets to be funded into your Living Trust. As well as the cooperation and ability of the third party companies or agents who we must work with to effectuate the changes of ownership and beneficiaries.

*There is a “potential deadline” for all of us, which is the day we become incapacitated or die.

I cannot overemphasize the importance of funding your Living Trust. It is imperative that we combine our efforts to ensure that your Living Trust is funded. There is much that I can (and will) do to assist you with your Living Trust funding. There are also certain steps that can only be taken by you, as the owner of your property.

Weekly emails throughout this summer will address the individual types of assets that should be funded into your Living Trust and how to accomplish each one.

It is my fervent hope that by providing relevant information (and reminders), that you will contact me, and we will work together to get any unfinished funding matters completed.

As always, it is my privilege to be of service to you.

I encourage and welcome you to call me regarding this email or for any other reason at all.

Independent Contractors - New Law

From time to time there is a change in the legal world that we feel is important enough to justify sending a note to our clients. We don’t do it often, but such an event just happened.

With tax revenues down some 30% last year, governments are trying to raise money however they can. One way to raise taxes is by ensuring more workers are classified as employees vs. independent contractors. On June 3, Governor Ritter signed House Bill 09-1310, which substantially increases the ramifications against employers who misclassify employees as independent contractors in an attempt to avoid their workers’ compensation and unemployment insurance obligations.

The new law empowers the Colorado Department of Labor to more easily investigate misclassifications. If a violation is found, the Department may order employers to pay back taxes and interest. If the investigation reveals that the employer has willfully misclassified an employee, the law authorizes fines of up to $5,000 for the first misclassification, and up to $25,000 per misclassified employee for the second and any subsequent misclassification. Employers found to have engaged in multiple, willful violations also may be barred from contracting with the state for a period of two years.

As you may know, there are several requirements for a party to be considered an independent contractor in Colorado. If you are concerned about meeting the independent contractor requirements, we are happy to discuss your situation and help ensure you are doing what you can to comply with Colorado law.

Wall Street Journal: Obama Plans To Keep Estate Tax

As you know, if you are a client of mine - The Estate Tax or "Death Tax" has been fluctuating since 2001, with a future uncertain. Well, now the future is beginning to take form.

When President Bush was elected in 2000, one of his campaign pledges was to make the estate tax go away. And Congress did, in fact, pass legislation that would abolish the estate tax. Sort of...

What they passed, the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGGTRA) enacted a series of increases in the amount of money your estate could be worth without paying “death taxes” — increases in the estate tax exemption, leading eventually to abolition of the tax during the year 2010.

However, EGTRRA sunsets, or reverts to the provisions that were in effect before it was passed on January 1, 2011 unless further legislation is enacted to make its changes permanent.

We may not have to wait long.

According to The Wall Street Journal:

Bottom line: if you expected the estate tax to actually go away, you were mistaken. As the laws change, it is important that you have your plan reviewed to make sure it is up to date. We can help you with this review. And if you haven’t yet created an estate plan, you should come and see us for a plan that takes all these new realities into account.

The Law Office of Bennett Braverman, PC - Opens its Doors

I am pleased to announce the opening of The Law Office of Bennett Braverman, PC!

After years of working in a partnership, the experience of starting a solo estate planning practice is an exciting one, and I’m looking forward to sharing my insights and experiences with you in my newsletters and on my blog.

I am now working out of the beautiful and historic Spruce Street Mansion in downtown Boulder, and I couldn’t ask for a better place to go to work every day.

Although my location and firm name have changed, my goals and priorities have not. I continue to believe that estate and legacy planning is much more than a collection of legal techniques. Rather, it should be a process that enriches and enhances the lives of everyone involved, leading to peace of mind for you and the people you love.

My mission statement, therefore, remains the same as it ever has:
• To be accessible and to communicate openly: I want you to feel totally comfortable.
• To operate with integrity: You will know that I have only your best interest at heart.
• To utilize the most up-to-date estate planning tools and knowledge: Your plan will be completed in an efficient, timely and meticulous manner.
• To be a student of your values and a teacher of the law, as it applies to your situation.

Thank you to all of my friends and clients who have supported me in my move. I look forward to seeing all of you, as well as new friends and clients, in my firm’s new home.