Private Wealth: “The uncertain state of the transfer tax laws creates some tax planning opportunities, but many more pitfalls and uncertainties. Retroactive reinstatement is a possibility, although likely to engender constitutional challenges that will take years to resolve. How do these uncertainties affect most estate plans?”
The U.S. tax law contains something called the generation-skipping transfer tax (GST). The GST is intended to prevent the transfer of wealth from one generation to a person of two or more generations below the giver without paying federal estate or gift tax. The GST applies when transfers of property by gift or at death by a person to a person that skips a generation such as to a grandchild or great-grandchild and the value of the property transferred exceeds the estate/lifetime exclusion amount.
In the pre-GST days (before 1976), people could create a trust that provided that assets transferred to their children and their descendants and held in trust would benefit each generation as long as the child or descendant were alive (the trust equivalent of creating a life estate) and on the death of a child or descendant, the assets would continue to be held in trust for the next generation. Because all the beneficiaries only had an interest in the assets while they were alive and did not have a general power of appointment to designate who would inherit their beneficial interest in the trust on their deaths, the value of assets transferred in trust was never subject to federal estate tax. The GST was enacted into law for the purpose of closing this huge estate and gift tax loophole.
GST is a complex area, not for the faint of heart. For people who want to learn more about the GST, I recommend an article called “The Generation-Skipping Transfer Tax – A Quick Guide” […]
The Hill: “An agreement has fallen apart on an estate tax proposal that had appeared resolved between Senate Democrats and Republicans, a lead negotiator said Tuesday.”
The Hill: “Senate Minority Whip Jon Kyl (R-Ariz.) told reporters on Tuesday that his estate tax proposal is near completion. ‘It is our hope that we can get together both on the proposal, the details are pretty well resolved, and on a process by which we can get it passed as soon as possible,' he said.”
Forbes: “First the family of Norman F. Levy . . . was swindled out of hundreds of millions of dollars by . . . Bernard L. Madoff . . . . Then Levy heirs coughed up $220 million to the Madoff bankruptcy trustee to repay personal withdrawals made before Madoff's Ponzi fraud collapsed in 2008. Now, adding insult to injury, the unlucky clan is fighting a $61 million estate tax bill from the Internal Revenue Service.”
Business Week: “Sure, heirs of the ultra-rich who die this year will get a break on estate taxes, but they could wind up paying even more in taxes on capital gains. . . . While heirs of the ultra-rich who die this year may enjoy an estate tax break (17,172 taxable estate tax returns were filed in 2008, according to IRS data), this gap year is having an unintended consequence. Far larger numbers of affluent families who suffer deaths this year could wind up paying stiff capital-gains taxes on inheritances.”
Forbes: “Worst case for wealth transfer: a $1 million exemption, plus a crackdown on planning techniques [such as GRATs]. Next year many more families may need to worry about federal estate tax and at the same time could have fewer ways to minimize its bite. . . .Some of the changes that could take place next year are already built into the law. Others could emerge through a revenue-driven form of creeping estate tax reform . . . .”
For an excellent discussion of the recent history of the federal estate tax, where it is today and where it may go in the future, see the Columbia Law School Magazine article by Daniel Gross called “The Estate Tax Mess.”
“The so-called ‘death tax' on estate transfers was repealed at the start of 2010 but is scheduled to spring back to life in January. The 12-month window for tax-free estate gifts raises some interesting questions—and a whole host of hypotheticals. Billions are at stake, but uncertainty reigns. What is going on?”
Bloomberg: “Lobbyists for small businesses, construction companies, manufacturers and other trade groups are racing the clock to convince Congress to reinstate the federal estate tax they’ve fought for years to abolish. The National Federation of Independent Business and more than 40 business organizations wrote Senate and House leaders last week asking for quick action on a proposed 35 percent levy on inheritances worth more than $10 million per couple.”
New York Times: “The estate tax isn’t dead. It’s resting. The tax has been eliminated for 2010, but the estates of people who die before the year is out may still not pass free and clear to their heirs. The complexities of the tax system and the likely return of the estate tax next year — maybe even sooner — are creating confusion for accountants, lawyers and many families. . . . Odd as it may seem, tax specialists caution, the absence of an estate tax could result in greater liability on smaller fortunes than on bigger ones.”
Wall St. Journal: “Congress shocked everyone by letting the estate tax lapse on Jan. 1. Now, here is the real stunner: For many, the lapse actually will raise taxes.”
The Hill: “Senate leaders are working on an estate tax deal to make it easier to move a bipartisan jobs bill. The deal discussed by Senate Majority Leader Harry Reid (D-Nev.) and Senate Minority Leader Mitch McConnell (R-Ky.) involves moving an estate tax bill through the Senate that would prevent a huge hike in the tax from taking effect in 2011, staffers and lobbyists say.”
A video from The Heritage Foundation called “The Death Tax Burden on American Business.” See also “Death Tax: Time to Kill It Forever.” I benefit from the death tax because I am an estate planning attorney who charges $3,500 to prepare an estate plan with a trust that will maximize federal estate tax savings on the deaths of a husband and wife, but I favor repealing the death tax. I think it is immoral to tax people all of their lives as they earn income and accumulate wealth and then tax the accumulated wealth a second time on death.
Another Heritage Foundation video on the same topic.
Heritage Foundation video number three on the death tax.
Heritage Foundation video number four on the death tax.
Forbes: “While the federal estate tax has temporarily lapsed for 2010, 19 states still take a bite out of their residents' estates. Although Congress has let the federal estate tax lapse for 2010, your estate might still be subject to a state levy at your death. The feds are trying to work out a compromise to bring the federal tax back, maybe retroactively to Jan. 1, and with at least $3.5 million in wealth exempt per person. But some states tax far smaller estates and these laws aren't going away. Currently, 19 states and the District of Columbia impose their own estate and/or inheritance taxes.”
Forbes.com: “Newly released data from the Internal Revenue Service show that from 2001 to 2007, as the estate tax was reduced, the percentage of wealthy decedents leaving charitable bequests declined too. The report is stoking charities' longstanding fear that bequests would drop off if Congress allowed the estate tax to lapse–as it did as of Jan. 1. The estate tax doesn't apply to sums left to charity, and traditionally about 8% of donations come through bequests.”
New York Post: “If Fritz Lohman had only known, he would have waited another 13 hours to kick the bucket. Lohman, 87, a SoHo real-estate magnate who pioneered the exhibition of gay art, died at home at about 11 a.m. on New Year's Eve after a long illness. If he had instead passed away after midnight Jan.1, his partner of 48 years could have avoided paying at least $3 million in estate taxes — thanks to Congress letting that levy lapse for 2010. ‘He would probably say, ‘Why didn't they tell me? I could have waited another day,' ‘ said Charles Leslie, 76, Lohman's business and life partner — and the sole beneficiary to his $10 million estate.”
Boston Globe: “NOT ALL deaths are sad. The federal estate tax died at 12:01 A.M. on January 1, an occasion of joy if there ever was one. Allowing it to expire was one of the few sensible things Congress accomplished in 2009. Keeping it dead should be a congressional goal for 2010. Estate-tax repeal was an element of the tax cuts George W. Bush signed into law early in his presidency. But the legislation was perverse.”
Wall S. Journal: “Nothing's certain except death and taxes — but a temporary lapse in the estate tax is causing a few wealthy Americans to try to bend those rules. Starting Jan. 1, the estate tax — which can erase nearly half of a wealthy person's estate — goes away for a year. For families facing end-of-life decisions in the immediate future, the change is making one of life's most trying episodes only more complex.”
Wall St. Journal: “The health care debate is one thing, but the current situation involving the federal estate tax really makes you question if the good folks in Congress have any idea what they’re doing. By failing to act on the estate tax, lawmakers have almost assuredly planted seeds for a good bit of litigation to kick off the next decade. . . . Dick Patten, president of the American Family Business Foundation, a Washington group that has campaigned against the estate tax], said: ‘I can guarantee this: if they succeed in getting retroactive in hiking the death tax from zero to 45%, there are going to be lawsuits. It’s going to be messy, it’s going to be noisy”.”
See “Estate Tax Expiration Sets Up Battle on Retroactive Restoration.”