No Claw Back on Estate Taxes, Say Experts

According to experts, the tax deal and extension of the estate tax will not create a retroactive gift tax liability. Thank heavens for small favors, am I right?

From AccountingToday.com:

The recent extension of the estate tax at a 35 percent rate will not result in a "claw back" tax obligation for people who make gifts in 2011 and 2012 that exceed their post 2012 estate tax exemption allowance, according to a trio of tax experts.

In a new BNA Tax & Accounting webinar that will be held on Feb. 10, 2011, Estate Tax Changes, noted tax authors and commentators Jerry Hesch, Alan Gassman, and Christopher Denicolo will present analysis concluding that the passage of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 does not cause this type of "claw back" tax obligation.

“Their analysis comes at a time when many commentators have speculated that a reduction in the estate tax allowance for 2013 could cause "retroactive gift tax liability for deaths after 2012,” said BNA Tax & Accounting managing editor Harry Pskowski.

The new $5 million exemption, together with a 35 percent tax rate, applies to estates of those dying in 2011 and 2012, as well as to gifts and generation-skipping transfers made in those years. Then, in 2013, the pre-EGTRRA law will return, with a $1 million exclusion and a maximum 55 percent tax rate.

The presentation will allow participants to focus on the opportunities offered for planners by these changes, and bring clarity where there has been much confusion.

Hesch, Gassman and colleague Christopher Denicolo will show how many estates of wealthy taxpayers who died during 2010 may elect to be subject to the estate tax in order to have new taxable basis in the assets they leave to facilitate having new depreciable basis and less capital gains liability for their families.

Continue reading at AccountingToday.com...

Does the Estate Tax Hurt Farmers and Family Businesses?

The battle cry against the estate tax usually rages around “farmers and family businesses.” Chuck Grassley (Iowa) has been insisting that the tax deal "makes sure the government can’t take more than half the estates of farmers and small business owners who have scrimped, sacrificed and saved their entire lives to build up a family business.” As it turns out, the estate tax only affects a small fraction of farms and family businesses.

According to a recent IRS report, these businesses account for a small fraction of estates worth $3.5 million or more:

The study shows that in 2007, investment real estate — which includes farms, undeveloped land, real-estate investment funds, real estate partnerships and other investments — accounted for only 15% of total portfolios for estates over $3.5 million. Farms are only a fraction of the 15%.

Limited partnerships and business assets account for about 5.5% of their total assets.

So what is in the big estates? Mostly publicly traded stock. The study found that publicly traded stock accounted for more than a third of the assets held by estates of $3.5 million or more.

Of course, some small businesses and farmers would get hurt from a $3.5 million rate. And there may be other good arguments for ditching the estate tax. But it’s misleading to say farmers and small businesses would bear the brunt of the tax. Unless of course, Paris Hilton’s brief stint on “Simple Life” makes her a farmer.

The real victim of the Democratic proposal would be wealthy shareholders and the stock market. Yet strangely, we don’t see politicians championing the rights of the stock market and big shareholders in their death-tax crusade.

Continue reading at WSJ.com...

Teddy Roosevelt on the Estate Tax, 100 Years Ago

Congress and the President are working out final details on a tax compromise that includes a revision to the estate tax for 2011. Over 100 years ago, Teddy Roosevelt gave his famous “New Nationalism” speech and discussed how America should deal with fortunes and inheritance.

TEDDY ROOSEVELT ON THE ESTATE TAX, 1910:

We grudge no man a fortune in civil life if it is honorably obtained and well used. It is not even enough that it should have been gained without doing damage to the community. We should permit it to be gained only so long as the gaining represents benefit to the community … The really big fortune, the swollen fortune, by the mere fact of its size, acquires qualities which differentiate it in kind as well as in degree from what is possessed by men of relatively small means. Therefore, I believe in a graduated income tax on big fortunes, and … a graduated inheritance tax on big fortunes, properly safeguarded against evasion, and increasing rapidly in amount with the size of the estate.

Hat tip: On Point Radio

Five Ways New Estate Tax Deal Affects you

After long last, we finally see what will happen with the estate tax in 2011. Until Congress made this move, the estate tax was set to return in 2011, at a top rate of 55% for estates valued over $1 million. In the deal reached between Obama and Republican leaders, the top rate will be 35%, and the tax will only apply to estates valued at over $5 million.

MarketWatch.com put together a list of the ways this deal on the estate tax will affect everyday taxpayers. You can find a section of their article below, or click here for the full text.

For starters, consider the possibility that most Americans won’t even need a plan for federal estate taxes, especially if Congress also passes what estate planners refer to as “portability.” That’s the ability of a surviving spouse to use the unused exemption of the first spouse to die.

“There will be a significant drop-off in the business of estate tax planning, because even more people will have no significant estate tax problems,” said Howard Zaritsky, a Rapidan, Va.-based attorney specializing in estate planning. “And if Congress also passes ‘portability,’ this will very significantly remove over 99% of the public from the need for estate tax planning.”

Some years ago, a net worth of around $3 million to $3.5 million was considered the wealthiest 1% of the population, according to Martin Shenkman, an attorney and CPA who practices in New York City and Teaneck, N.J.

In a report on the tax compromise, written for Steve Leimberg’s Estate Planning Newsletter, Shenkman said: “A $5 million threshold would thus mean far less than 1% of the families would be effected. If in 2009, with a $3.5 million exclusion, only about 16,000 decedents filed a federal estate tax return, a $5 million exclusion should reduce the number to a miniscule figure.”

Of course, the specific federal estate tax exemption and rates could still change, but if the proposed agreement does in fact become law, estate planners say these five moves will be important to manage your financial affairs properly:

1. Create a bypass trust

Don’t overlook the potential need for a bypass trust.

According to Shenkman’s report, “Failing to establish the bypass trust that had been the cornerstone of most tax oriented estate plans of the past might lead the surviving spouse to a taxable estate problem, especially if the survivor’s exclusion is not indexed for inflation.”

Continue reading at MarketWatch.com...

The Walking Death Tax

Although a deal may have been reached for the Bush tax cuts, and an unemployment benefit extension, Congress seems to have forgotten about the estate tax. In just 26 days, the estate tax is set to return at levels that will hit the middle class.

The Wall Street Journal reports:

Without action in the lame duck Congress, the estate tax will rise from the dead on January 1 with a vengeance, the rate climbing back to 55% from zero this year. The exemption amount will revert to a miserly $1 million, unindexed for inflation, so more middle class taxpayers will get hit year after year.

President Obama and Congressional Democrats don't think this is a high priority, but voters do. A November Gallup Poll found that Americans think that keeping the estate tax "from increasingly significantly" is "very important" by 56% to 17% "not too important." That's more than think it is a priority to extend current tax rates (50%), extend jobless benefits (48%), ratify the Start treaty (40%) or let openly gay men and women serve in the military (32%).

Liberals are content to let the rate revert to 55%, with some moderate Democrats arguing for a 45% rate. Republican Jon Kyl of Arizona and Democrat Blanche Lincoln of Arkansas are pushing a compromise that would lower the top rate to 35% with a $5 million deduction. That rate is still 35 percentage points too high for our liking, but we'll take it as an alternative to the greedy political confiscation of more than half of the wealth built by someone who has saved over a lifetime. An estate of $5 million isn't all that much for a successful and thrifty business person with some real estate to accumulate over 50 or 60 years.

Mr. Obama, who professes to care about small businesses and jobs, should pay attention to new estimates by the Joint Committee on Taxation. The committee finds that reverting to the 55% rate with a $1 million exemption will tax roughly 10 times more small businesses and farms than would Mr. Kyl's proposal. A recent study by Doug Holtz-Eakin, the former director of the Congressional Budget Office, finds that the estate tax reduces savings and capital formation and forces family businesses to liquidate at the time of an owner's death, which puts hundreds of thousands of jobs in peril.

Read more here

Return of Estate Tax Looms as Final Impediment to Extending Bush Tax Cuts

Experts predict that a compromise on the Bush-era tax cuts may involve a return of the estate tax. Without any action at all, the estate tax will go from the 2010 zero percent, to a 2011 top rate of 55% on estates over $1 million.

Bloomberg.com reports:

A new tax on multimillion-dollar estates may emerge as the final hurdle to a deal that preserves most or all of former President George W. Bush’s tax cuts, analysts said. Congress has unsuccessfully sought at least a half-dozen times to resolve the issue since 2000, including an abandoned effort last December to prevent the estate tax’s expiration.

“The history on the estate tax is every time there’s almost an agreement someone leaves the table in the belief they’ll get a better deal next time,” said Clinton Stretch, a managing principal at the Washington consulting firm Deloitte Tax LLP.

With Obama planning to meet with bipartisan congressional leaders at the White House tomorrow, three main factions have formed in the Senate, none of which has the 60 votes needed to advance an estate-tax proposal. One includes Republicans such as South Carolina’s Jim DeMint who favor permanent repeal. Another is led by Democrats including Majority Leader Harry Reid who support a top rate of 45 percent that would apply after a $3.5 million tax-free allowance.

Read more here

Another Tax that Democrats want to Raise from the Dead

While Congress continues to debate whether or not to extend the Bush tax cuts, some members of the Senate have reportedly been considering an estate tax hike. The tax expired at the end of last year and is scheduled to return at a rate of 55% in 2011. However, a couple of Congress members are suggesting a new 65% tax.

The Washington Post reports:

The Senate Redistribution Caucus—Bernie Sanders (Vermont), Sheldon Whitehouse (Rhode Island), Al Franken (Minnesota), Sherrod Brown (Ohio) and Tom Harkin (Iowa)—are sponsoring the Responsible Death Tax Act to take the federal rate to 65% on large estates. Why stop at two-thirds, guys? Clearly, you think the government has a right to every penny a man makes in a lifetime.

These same five plus Budget Chairman Kent Conrad of North Dakota also want to retroactively apply a death tax to January 1, 2010 on the estates of those who have already died this year. Their revenue grab gives new meaning to the phrase grave robbers. Too bad George Steinbrenner, who died earlier this year and whose family will be able to retain control of the New York Yankees in part because of the lack of an estate tax, can't come back from the dead and shout at these guys.

It's not merely the super-wealthy who will pay these rates unless they shelter their assets in foundations the way that Bill Gates and Warren Buffett have. Estates with as little as $1 million in assets would get hit at the reinstated 55% rate. That $1 million has not been indexed for inflation, so each year more and more middle class families would pay when mom or dad dies. For hundreds of thousands of families, $1 million can easily be the value of the family home, furniture, jewelry, cars, plus a 401(k). All of this would be fair game for IRS confiscation.

The ability to transmit wealth from one generation to the next is a core motivation for Americans to save, reinvest in the family business or accumulate wealth. A 1980 study co-authored by White House economic adviser Larry Summers on savings and capital accumulation in the first three-quarters of the 20th century found exactly that: Americans continue to save even as they get older so they can pass their lifetime legacies on to their kids. But if you can't take it with you, and you can't leave your lifetime earnings to your children or grandchildren, the motivation is to spend down wealth to zero at the time of death.

Read more here

No Estate Tax Due in 2010 but Beware of Cap Gains

As it gets closer and closer to the end of 2010, experts are beginning to wonder if Congress will make any changes to the estate tax or not. As you probably already know, there is no estate tax for people who pass away this year. Many had expected that Congress would impose a retroactive tax, but with only a few months left in 2010 it is unclear if legislators will tackle the estate tax before the end of the year. However, according to Boston.com that does not mean that large estates get a "free pass" this year.

Things might even be more complicated. That is because a "carryover basis" rule is in effect this year. In previous years, people inheriting property enjoyed a "step up" in basis. That is, the basis of the property they inherited was generally the value of the property when the previous owner died. In 2010 however, people inheriting property also inherit the decedent's tax basis. This means that if you are inheriting property this year, you have to hope the decedent kept very detailed records.

The executor administering the estate can, however, increase the basis of the assets by $1.3M plus any expiring loss carryforwards and the amount by which any asset is worth less than its original cost. The practical implication of this $1.3M is that any estate with untaxed appreciation of up to $1.3M will escape tax free. However, the executor is responsible for designating those assets that will receive the $1.3M. If he or she doesn't pick the assets you inherited, you could find yourself owing taxes upon the sale of the inherited property. However, the good news is that the gains will be taxed at capital gains tax rates.

It is important to note that assets that pass to a surviving spouse are entitled to another $3M in untaxed apprection so it is still possible to shelter as much as $4.3M in appreciation. If you are the executor of an estate for someone who died in 2010, be sure to seek the assistance of a CPA because the rules can be very complicated and you don't want to make a costly error. And if you inherit assets from someone who died in 2010 be sure you know the basis of the asset and if you might owe capital gains taxes be careful to time the sale to minimize any taxes.

Latest Good Reads

BP, Oil Spills, and Giving Up Tax Breaks

No Progress in California Budget; May Soon Impact Tax Refunds

Mickey Mouse, the Estate Tax and Me

It’s National Coupon Month!

US Senate Rejects Effort To Repeal Estate Tax

From AutomatedTrader.net:

A Republican-led effort to permanently repeal the estate tax garnered only 39 votes in the Senate, as the motion failed during debate on extending jobless benefits.

Estate-tax votes are closely watched since they occur infrequently, and opponents of the tax and its supporters seek to gain ground among lawmakers.

The motion from Sen. Jim DeMint (R., S.C.), fell on a 39-59 vote. Senators Olympia Snowe and Susan Collins of Maine and George Voinovich of Ohio—voted to oppose repeal.

Senators Blanche Lincoln of Arkansas and Ben Nelson of Nebraska—supported the repeal effort.

Under the 2001 tax cut law, the estate tax was repealed for one year only in 2010. Heirs of those who die this year are not subject to any federal estate tax, although they must pay a capital gains tax when they sell inherited assets.

Congressional Democrats have said they want to reinstate the tax at levels in effect in 2009--a 45% tax rate on inherited wealth that exceeds $3.5 million.

Latest Good Reads

Senate rejects permanent estate tax death

New Harris poll shows Americans still trimming daily expenses

Small business form – Partners or Associates?

Update on UBS secret bank accounts: Swiss Court ruling on release

Getting your credit limit raised

Two Senators Propose Reinstating Estate Tax

From Reuters.com:

Two senators, a Democrat and a Republican, have reintroduced a proposal to reinstate the estate tax, which lapsed this year amid a row among lawmakers over taxing the wealthy when they die.

Democratic Senator Blanche Lincoln and Republican Senator Jon Kyl late on Tuesday reintroduced a plan to tax estates over $5 million at a rate of 35 percent. The estate tax that expired last year had taxed estates at a rate of 45 percent, above an exemption of $3.5 million for individuals and above $7 million for couples.

There is no estate tax in 2010 because lawmakers last year failed to reach a deal to extend the tax. The House of Representatives last year had passed an extension of the 2009 rates, but senators clashed over the level of the tax.

Without action, under current law the tax will rise to 55 percent, with an exemption level of $1 million.

Several billionaires have died this year, escaping the estate tax, including former New York Yankees owner George Steinbrenner.

Inherited Wealth Shouldn't get a Free Pass on Taxes

From LA Times.com:

Dan Duncan is reportedly the first billionaire to die during the one year since 1916 in which there is no estate tax in place. And guess what…his heirs have hit the tax-free jackpot!

Duncan is the poster child for opponents of the estate tax. Described by the New York Times as a "soft-spoken farm boy who started with $10,000 and two propane trucks," he grew his business until he became the 74th wealthiest person in the world.

With an estimated net worth of $9 billion, Duncan embodies the rags-to-riches story that Americans love. Even his choice of bequests — leaving his money to his family and his favorite charities — makes him seem "just like us." Who better to enjoy Congress' largesse?

However appealing, this story fails to capture the nature of the estate tax, including the people who benefit and are harmed by its repeal.

The one person who absolutely cannot benefit is Dan Duncan himself. When Duncan died, he was separated from all his property by a force even more powerful than the federal government.

A Responsible Estate Tax

In the face of record-breaking deficits, lawmakers are looking for ways to increase tax collections. And the estate tax is ripe for changes. Since January 1, 2010 the United States has been estate tax free, which means our government has already missed out on some big dollars when Texas billionaire Dan L. Duncan passed away this March. Not anxious to miss out on more money, Don’t Mess with Taxes writer, Kay Bell reports that two new estate tax bills are in play.

One bill, written by five senators, proposes a progressive estate tax structure. According to Senator Bernie Sanders, the bill’s sponsor, “99.7% of Americans would not pay any estate tax whatsoever.” The bill states:

• The first $3.5 million ($7 million for married couples) of an estate is exempt from federal taxation.
• Estates valued over $3.5 million and under $10 million would be taxed at 45%
• Estates valued over $10 million, but under $50 million would be taxed at 50%
• Estates valued over $50 million would be taxed at 55%
• Estates valued over $1 billion would have an additional 10% surtax

A popular argument holds that family farms are hurt by estate taxes, so this bill allows farmers to lower the value of their farmland by up to $3 million for estate tax purposes.

The second bill being discussed is a bi-partisan effort from two members of the Senate Finance Committee. While the bill has not been proposed yet, it reportedly includes a 35% top rate, and excludes any estate under $5 million ($10 million for couples). The bill may also include an incentivized pre-payment concept, wherein a person could pay a lower estate tax if they pay up before they pass on.

Read the full article here:

Questions for the Tax Lady: June 14th, 2010

Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply, and I will do my best to get an answer for you!

Question #1: Roni, I know that the federal estate tax is on hiatus this year. However, are there any state tax agencies that will collect an estate tax?

Yes. There are plenty of states that do enforce an estate tax (Indiana, Iowa, Kentucky, Maryland, Nebraska, New Jersey, Ohio, Oklahoma, Pennsylvania, Rhode Island, Tennessee, and Wisconsin). However, the rules and rates vary for each state. If you live in one of the states listed above then I highly recommend speaking with an estate-planning attorney in your state.

Question #2: Will an accepted Offer in Compromise remove a bank levy?

An accepted Offer in Compromise will resolve your back tax liability with the IRS once you paid the amount offered in compromise. Once your back tax liability is resolved, the IRS will not pursue collection activity against you—this includes bank levies. What you need to know is that the Offer in Compromise process is lengthy and because and you only have 21 days to release a bank levy, filing an offer in compromise for the purpose of releasing a bank levy may not be the wisest choice. For more information regarding how to get tax levies released, check out this blog entry on the RoniDeutch.com Tax Relief Blog.

Confusion Over the Dormant Estate Tax Keeps Advisers Busy

From NYTimes.com:

The disappearance of the federal estate tax this year has created confusion and frustration among the wealthy, even among those who stand to benefit from it. And this has sent them in droves to amend documents that they may have to change again next year.

Steven H. Goodman, an accountant and financial planner in Melville, N.Y., says he has not had a meeting recently without clients asking him what they need to do this year and for 2011, when the tax is set to return at a higher rate than when it expired. Yet for all the business this has brought his firm, the SHG Financial Group, Mr. Goodman says he is not happy. “It’s a pain in the neck,” he said. “Even though I do this for a living, no one likes to do this.”

Those who work with the extremely rich say they, too, have been exceedingly busy, but for a different reason. The wealthiest are looking to take advantage of a short-term trust that allows people to pass money to heirs tax-free — what’s known as a grantor retained annuity trust — out of fear that the federal government could change the terms of these trusts. Cheryl E. Hader, a partner in the individual clients group at Kramer Levin Naftalis & Frankel, said she set up 30 of these trusts last month, up from six in a normal month. Daniel L. Kesten, a partner in the private client group at Davis & Gilbert, a law firm in New York, said he was working nights and weekends last month setting up the same type of trusts.

How this boon to tax advisers happened is yet another chapter in the partisan gridlock common to Washington these days. At the end of 2009, Max Baucus, the Montana Democrat who is chairman of the Senate Finance Committee, tried to extend for three months the existing estate tax laws, put in place in 2001. But when that motion failed, the estate tax expired for the first time since 1916.

What this has meant is that the heirs of wealthy people who die this year will owe no taxes. An extreme case, as detailed in an article in The New York Times on Tuesday, is that of Dan L. Duncan, who died two months ago with an estimated wealth of $9 billion. His heirs will inherit his estate without paying the 45 percent tax that was in effect in 2009, billions that would have gone to the Treasury.

Texas Billionaire’s Legacy

On January 1, 2010 the federal estate tax disappeared. While every tax-minded person out there, myself included, assumed Congress would step in and reinstate it, that just didn’t happen. So, when Texas billionaire, Dan Duncan, died in late March, his entire $9 billion estate passed on to his family, tax-free.

Had he passed three months earlier, his estate would have been subject to 45% federal estate tax. Had he lasted until 2011, that estate tax would have gone up to 55%. But, since Congress allowed the estate tax to lapse for one year, his heirs will receive the whole kit and caboodle without Uncle Sam getting a cut.

Rumors that Congress will instate a retroactive estate tax continue to circulate. With enormous deficits and historically low tax revenues, the government loathes missing out on the billions of dollars Mr. Duncan’s estate would have produced. However, Mr. Duncan’s heirs certainly have the financial means to battle any such law’s constitutionality in court.

No one knows what Congress will do at this point. To read more about Mr. Duncan and the estate tax, read the full article here.

Senate Deal off on Estate Tax

We are currently without an estate tax and as 2010 continues, Congress is making little progress on fixing the tax law that created this situation. 2011 is just around the corner and if Congress does not pass new legislation soon, the estate tax will resurface at a much higher tax rate. Yesterday, Senate leaders stated that the estate tax proposal they had been considering fell apart. I guess it is back to the drawing board for Congress with regard to the estate tax.

As blogger Vicki Needham explains, the Senate Minority Whip Jon Kyl (R-Ariz.) said the accord, which was all but forged a week ago, began to dissolve Monday night and broke down Tuesday.

After talks with Senate Finance Chairman Max Baucus (D-Mont.) and Senate Minority Leader Mitch McConnell (R-Ky.), scrapped a plan to move forward with the tax that expired at the end of 2009.

The reasoning, Kyl said, is that Senate Democrats aren't allowing any legislation to reach the floor that doesn't have support from the majority of its members.

"We no longer have an agreement because the Democratic side has decided that unless a matter has a guaranteed majority of Democratic votes going in, they're not going to allow it on the floor, at least not voluntarily," he said. "So we have to find a way to get a reasonable permanent estate tax reform to the floor where members can vote on it."

Continued at The Hill.com…

Latest Good Reads

Seven tax tips for business

Claiming the residential energy credit

Estate Tax: leave it alone

IRS oversight board releases 2009 annual report to Congress

How To Protect Your Family From Estate Tax Uncertainty

From Forbes.com:

An Illinois woman inherited just about $100 million this year. Estate taxes could consume 53%, 45%, 16% or none of it, depending on whether the federal and/or Illinois estate taxes--which both lapsed on Jan. 1, 2010--are reinstated retroactively. "It's wacky to have so many scenarios and not know what the tax is," complains Richard A. Lang, a Chicago partner of McDermott, Will & Emery representing the estate.

You're not crying for the heiress or her lawyer? Then consider another Lang client, a widow trying to divide her late husband's modest estate with the children from his first marriage without incurring ill feelings or big lawyers' bills. The husband's will was tied to the defunct federal estate tax. Now, by one legal reading the widow gets everything outright. By another, all the assets go into a trust that ultimately goes to the children, with the widow having access to the trust's earnings (and, if need be, principal) while she's alive. "This is going to be worked out," Lang vows.

Lots of families are living in similar estate limbo. Under the crazy terms of the 2001 Bush tax cuts, the federal estate tax expired on Jan. 1, 2010 and then springs back to life on Jan. 1, 2011, with only $1 million in assets exempt from a stiff 55% levy on all assets not left to a spouse or charity. Meanwhile, a long-standing provision, which "steps up" the basis of someone's assets to their market value at his or her death (allowing them to be sold immediately with no capital gains taxes due), has also lapsed for 2010.

President Obama and most Democrats want to restore the estate tax retroactively to its 2009 state--meaning $3.5 million per estate would be exempt, the tax rate would be 45% and all assets would get a step-up in basis. Republicans want a higher exemption and lower rate. When and how this gridlock will end is anyone's guess. After all, rational folks (including most estate planners) had assumed Congress would cut a deal before the tax expired. Complicating matters: Any retroactive tax is likely to face an epic court fight from rich heirs, perhaps including those of Texas pipeline tycoon Dan L. Duncan, who died in March with (we estimate) $9.8 billion.

Continue reading at Forbes.com…