Estate Tax and It's Impact

What's Another 100 million Between Friends?

By Cynthia L. Turoski, CPA, PFS, CFP®

George Steinbrenner’s heirs made out well financially due to his untimely, but timely, death in the year of estate tax repeal. Forbes magazine estimated his estate at around $1.15 billion. By dying in 2010 instead of 2009, his estate saved about $500 million in federal estate taxes –a big chunk of change his heirs get to keep. If he were to have died next year, his estate would have owed more than $600 million based on the scheduled reinstatement of the estate tax.  At that point, what’s another $100 million?

Steinbrenner became the fourth known U.S. billionaire to die in 2010 and escape federal estate tax (barring any retroactive estate tax reinstatement). The first prominent U.S. billionaire to die this year was Houston oilman Dan Duncan whose net worth was estimated to be $9.8 billion. Estate taxes likely would’ve been more than $4 billion. Mary Janet Morse Cargill, whose family founded Cargill Inc., died in February with a net worth estimated at $1.6 billion. In June, California real estate mogul Walter Shorenstein died with a net worth estimated at $1.1 billion. Once the wealthiest man in America, John Kluge just died with a 2009 estimated net worth of $6.5 billion and an estate tax savings of almost $3 billion.

The heirs of the billionaires who died this year are “fortunate” to have saved so much in estate taxes, but they can’t rely on fortune to determine how their benefactor’s estate plan “plays out.” It’s certainly not a wise course of action to rely on chance when it comes to protecting your estate, and there are actions you should take right now to deal with the possibilities that lie ahead.
The U.S. government is missing out on large sums that are much needed. Yet, Congress isn’t too focused on the federal estate tax at this time. Most of the discussion centers around whether the Bush income tax cuts should be extended before they expire at year-end.

THE CLOUD OF UNCERTAINTY HASN’T CLEARED
Unless the law changes, both the estate tax and the generation skipping transfer (“GST”) tax will return in 2011 with a $1 million dollar exclusion and a top rate of 55 percent. In addition, gift tax rates will rise from a maximum 35 percent in 2010 to 55 percent in 2011.

The law might change before 2011…or it might not. There could be a retroactive reinstatement of the estate tax or a prospective change. Most estate planning professionals doubt there will be a retroactive change at this point, but it could still happen. There has been some talk in Congress of allowing executors of 2010 estates to choose between the rules under the 2010 repeal (no estate tax, but carryover basis) or the 2009 rules (with an estate tax, but step-up in basis of inherited assets).

There has also been some talk that Congress would enact a change by September 30th so executors of January 2010 estates would know what to do when filing estate tax returns due in October. That chance seems more unlikely now. Others speculate that lawmakers will let the 2010 repeal continue and wait until late 2011 to make any law change. Doing so would allow them to garner maximum campaign contributions in the meantime from those who hope to influence their decision one way or the other.

That’s certainly a possibility the longer we get into 2010 – what’s the rush once we’re into 2011? It’d be easy enough to do a retroactive law change to 1/1/11, and at that point to bring the exemption to $3.5 million or $5 million. Unlike a 2010 retroactive law change, executors wouldn’t sue for a retroactive law change in 2011 since it would benefit the estate.

Taxes are always a political issue, but even more so now due to the current economy, the budget deficit, and with elections being just around the corner. It doesn’t appear that lawmakers will resolve the income tax issues before elections. Each side of the fence seems to relish the idea of using the topic against the other party for election purposes and they soon will be going home to campaign. Therefore, the estate tax will likely stay repealed at least until after elections or longer.

GET PREPARED  IN CASE SOMETHING HAPPENS TO YOU “TOMORROW”
Many wills, trusts, and related estate planning documents were created under different tax circumstances and were designed with tax formula clauses. If these clauses don’t work, a spouse could be disinherited or more may go to charity than intended. The current uncertainty would suggest that individuals should have these clauses reviewed for effectiveness.

Regardless of the estate tax flux, it’s just as important, or even more important, to review your overall estate plan to make sure all the pieces would work the way you want. So often there are many unintended consequences that have nothing to do with taxes. Don’t wait – take these steps now:

1. Confirm executors, trustees, and guardians are current
2. Make sure assets flowing through the will and outside the will (i.e. joint accounts, retirement accounts, life insurance, annuities, etc.) are going to who you want and in the right amounts
3. Confirm the timing of when heirs will receive assets (i.e. outright or in trust for some time period)
4. Shore up legal documents with a power of attorney, healthcare proxy/living will
5. Prepare for a possible State estate tax liability

If you have concerns or questions about estate tax impacts or implications for your current situation, or would like some further clarification on steps to pursue now, please call me at (518) 250-7757.