Wednesday, February 17, 2010

Estate Tax, Estate Tax, Wherefore Art Thou?

Used to be, when one died with more than a few dollars in the bank, there would be an estate tax payable to Uncle Sam. Calculating in advance what that would be was, in fact, more art than science, but was an integral part of the estate planning process. Often, if an estate was sizeable enough, some form of life insurance would become part of the overall plan, since it would provide immediate and inexpensive dollars to pay the taxes due.

This year, there is no estate tax in place - at least not yet. The previous legislation expired, and Congress has yet to get around to replacing it (a sure bet, since dead folks don't complain). The problem is, no one knows if or when such legislation will be enacted, and whether or not it will be retroactive back to the first of this year [ed: I have a bridge in Brooklyn to sell to anyone betting against it]. In the face of uncertainty, then, what's one to do?

According to U S News and World Report, this failure to act "has moved from an oversight and embarrassment to a growing real-world problem. To recap: the estate tax was reduced over the past decade in a 2001 law that said estate taxes would disappear totally in 2010, and then return in 2011 in a very punitive form."

So is it a good idea to die in 2010?

Probably not (at least not any better than any other year): there's a little known but potentially devastating twist that seems to have gone under a lot of folks' radars: previously, beneficiaries ("heirs") were able to declare the value of that which they received on a "stepped up basis." That is, they would receive, say, a piece of land that was worth $1 million when their benefactor died, and their ownership would begin at that $1 million mark, not the $35,000 grandpa had paid for it:

"But as part of the end of the estate tax this year, this treatment of assets also was ended. Now, the value of the estate is subject to tax on the difference between its current market value and the value when it was originally obtained by the estate holder."


So absent either clear guidance on how estate taxes (if any) will be calculated, and absent this rather valuable treatment of proceeds received from someone's estate, a number of new issues arise: namely, how does one even begin to calculate how much to set aside (or insure) for potential estate taxes? And another, less obvious question, brought to my attention from the Director of Advanced Sales from a well-respected life insurer:

"No one knows what to advise a client to do. I've read several articles that advise anyone appointed executor of an estate to decline it. Then the court would have to appoint someone ... and then if that person declines [what then]? Don't know what would happen if the court couldn't find anyone to accept the job and the personal liability that goes with it."


[Hat Tip: FoIB Brian D]
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