Estate Taxes - To Where from Here?

November 12, 2009
Michael Sheehan

Estate planners are wrestling with the complexities involved with a possible estate tax repeal. Calculating the tax basis if it is repealed will be much more difficult, compounded by a short time frame.

The estate tax, dubbed by its opponents as the “death tax,” was one of the hot buttons of George W. Bush’s administration, which won its battle, gradually shrinking the estate tax burden by raising the exemption amount and lowering the tax rate. Currently, heirs can shield up to $3.5 million dollars from the estate tax and pay a 45% tax on any amount over that. Next year, unless Congress acts, the estate tax is scheduled to disappear entirely, only to reappear in 2011 with the old parameters of a $1 million exemption and a 55% tax rate back in place.

Congress will act to extend the tax, say many political pundits, with powerful committee chairmen in both the House and Senate coming out in favor of a short-term fix that would put a freeze on the current exemption and tax levels. But what Congress may do, say Washington observers, is never certain. It may keep the estate tax but change the exemption and the tax rate or it could keep the current levels and put some kind of surtax on larger estates.

In the meantime, estate planners are wrestling with another complex issue tied to possible estate tax repeal, which is the basis. Under the current law, the basis on property passed on to heirs is the market value on the date of death. Calculating the basis if the tax is repealed will be much more difficult, say tax experts. The uncertainty is compounded by a short time frame. With just a few weeks until total repeal takes place, lawmakers may have to reinstate the tax retroactively if they don’t do it by year-end, which will make estate planning even harder.