Recently at a cocktail party I was asked what was up with Estate Tax reform. It seems that the lady posing the question had an aged mother that was worth about $1,700,000. She and her sister were the beneficiaries of the mother's Trust. The mother's condition was such that while death was not eminent, could occur at any time. The estate consisted largely of marketable securities held in several brokerage accounts. Was it true she asked if her mother died in 2010 that there would be no estate tax? What will happen if Congress and the President change the law? Between sips of Chateau Thames Embankment my answer was something like this:
"Today and until midnight December 31, 2009, there is no applicable Federal Estate Tax on your mother's estate assuming that she has not used up her gift tax credit and made a lot of very big gifts. The reason for this is that the Federal Estate Tax applicable exemption amount is $3,500,000 for 2009 and that is more than twice the value of her estate. So no Federal Estate Tax if your mother dies this year. Even if there is no tax, the securities in her estate will all be valued as of the date of her death so all of the appreciation from the date of acquisition to her date of death will be wiped out. This could make a significant difference in how much capital gains tax must be paid when the securities are later sold by you or her sister.
If the mother dies in 2010, the Federal Estate Tax will have been repealed so no estate tax, however the dreaded "carryover basis" problem arises and under carryover basis all those securities after death will have the cost basis they had in your mother's hands while she was alive. In other words, the securities in her children's hands will be treated just like they would have been if mom had gifted them during her lifetime. A little tax relief is allowed by a basis adjustment available to your mother's Trustee who can revalue assets upwards to date of death values and eat up $1,300,000 of "gain" from the carried over basis. Were mom's husband living there would be an additional $3,000,000 of basis adjustment. In order to take advantage of this "basis adjustment" the Trustee will have to report these adjustments on a Federal Estate Tax return even though the estate is much too small to pay a tax.
So, now virtually every estate irrespective of size will have to file a Federal Estate Tax return (with the attendant not insignificant expense). Is this the "Tax Accountant's Full Employment Act" or what?
But wait there's more:
If Mom has the tenacity to live until 2011 the old Federal Estate Tax returns with an applicable exemption amount of ONLY $1,000,000 and a 55% top rate. If mom's estate stays at the same amount, you and your sister can figure on forking over to Uncle Sam $350,000 +/- in estate taxes!
Perhaps we should all write our Senators and tell them that it is time to stop posturing and finger pointing and they should figure out a way out of this mire. (The Pomeroy Bill, which continues the tax regime in effect for 2009, is a highly applauded approach). At last report, the estates of members of the United States Senate are not given a bye from the application of the Federal Estate Tax."
She popped the olive from her martini in her mouth and turned on her heel and walked away. Perhaps like the famous book report on the book about penguins, I'd told her more about "tax reform" than she wanted to know.