With No Fix on Estate Tax, Uncertainty Reigns


With no action from Congress, planners, people, left in lurch

SANTA ROSA - For years, estate planners and accountants have discussed 2010 in terms of "What will happen with the estate tax?"

Some, like Frederick Caspersen, partner at Farella Braun + Martel, a San Francisco-based law firm with an office in St. Helena, expected the exemption rate to stay the same, at $3.5 million for individuals, at least for the time being, and the tax rate to stay the same as well, at 45 percent.

But now, he said, “I don’t think we will have a long-term solution until 2011. Congress doesn’t like to make changes before an election.”

He had expected a patch for 2010, something Congress could easily do so it wouldn’t have to come up with a permanent fix.

That was the expectation for most, that Congress would either make a permanent or temporary fix that would keep the tax at the $3.5 million level and at the 45 percent rate or perhaps go to $1 million, but there was a consensus among tax professionals that some form of legislation would come down.

However, in a surprise move, Congress did nothing and the estate tax expired, making it virtually impossible for estate planners to work with their clients. The House passed its version of the bill to extend the precedent for another year, but the Senate did not.

Dell Coats, partner with G&J Seiberlich in Napa, said doing any planning at all is difficult now because of the uncertainty.

In a letter addressed to Senate Majority Leader Harry Reid and Republican Leader Mitch McConnell, the chairman of the Senate Committee on finance, Max Baucus, and the ranking member of the same committee, Chick Grassley, said they intend to address the extension of various tax provisions expiring on or before Dec. 31, 2009 early in the year.

Joni Fritsche of BPM in Santa Rosa said the letter shows that the Senate knows it needs to make a decision soon.

“I have never seen a letter like this before,” she said. “It is like they are saying, ‘Oops, we messed up.’”

She said there are 6,000 estates that are impacted by the tax in 2010.

Ms. Fritsche said that if Congress comes back and passes a tax, it would technically not be able to make it retroactive to the beginning of the year.

“You cannot enact a tax retroactively,” she said.

That means that anyone who dies before something is passed will have estates that are not subject to an estate tax, although they may be subject to taxes on increases values of some assets.

Steve Goldberg, an estate planning attorney and partner at Friedemann Goldberg LLP in Santa Rosa, said it is a bad result for upper to middle class America.

“They have left a mess. It is unfair for the estate planning community and our clients,” Mr. Goldberg said.

“Unless they fix this soon, we are going to have to come up with two estate plans, one for now, before anything happens, and one for later when they fix this thing.”

He said there is concern that the tax will drop to the $1 million level.

“That would be pretty terrible for California, even with the real estate drop, it doesn’t take much to get more $1 million.”

In addition, for 2010, the step-up cost basis expired, so heirs will have to pay capital gains tax on the difference between the original purchase price of what they inherit and the value.

For heirs who get property or stocks, this can mean they will be taxed at a higher rate than they would have under the old estate tax law.

“I think the whole thing is a little nuts,” he said, as they have known about this for years, and can’t get it together to do something about it.”

While the estate tax is gone, the gift tax for 2010 is 35 percent.

“You may see a lot of people making significant taxable gifts this year as the rate has been 45 percent,” he said.


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