For those of you who are pleased that there may not be any estate tax on the estates of  decedents dying in 2010: don’t be.

As reported in one of my previous recent blog posts, not only did EGTRRA 2001 (George Bush’s tax bill) provide that there would be no estate tax on the estates of decedent dying in 2010, but it also provided that those estates would be subject to modified carry-over basis rules, which would (will) be a real calculation nightmare.

But that’s really the least of it, because the carry-over basis rules could lead to taxes on the estates of less affluent individuals than would not have been subject to estate tax under the law as in effect in 2009.

Let’s take a couple worth $6,000,000 that includes assets with significant built-in appreciation (perhaps they were smart enough to have gotten aboard the Google bandwagon when that stock first went public). With some simple basic planning, if death occurred in 2009, there would be no estate tax due on either spouse’s estate, and the Google stock would receive a step-up in basis to its value at death for the estate and for the couple’s family members who inherit the stock. But if death occurs in 2010, there could be significant potential capital gains taxes built into the Google stock.

In other words, the law that appeared to “giveth” only did so with one hand, because it also “taketh” with the other. With all of the lead time there was before 2010, no one I know thought it was possible that Congress would not take corrective action beforehand; yet that is exactly what has happened.

Most people still think that corrective action will be taken, and that it will be retroactive to January 1, 2010 (which the Supreme Court has ruled is perfectly legal), but these days, no one can be certain about anything that emanates from Washington DC!

All I can say is: stay tuned.

Happy Holidays to all!

Among many other tax law changes, EGTRRA 2001 (George Bush’s tax bill) provided that there would be no estate tax on the estates of decedent dying in 2010, but that those estates would be subject to modified carry-over basis rules (a real calculation nightmare!). That was effective only for 2010, however, and, starting in 2011, everything was to go back to the way it was before EGTRRA: the exemption would drop back to $1,000,000, the top estate tax rate would go back up to 55% (60% on certain large estates), and the “step-up in basis at death” rules would again apply.

This is clearly an untenable situation and makes intelligent estate tax planning next to impossible. Yet here it is about two weeks before 2010 is upon us, and we still don’t know what the law will be come January 1.

There have been innumerable prognostications about what Congress might or might not do, and various bills have been introduced in both the House and the Senate, but the first actual action in either chamber occurred a little over a week ago, when the House passed a bill extending permanently the estate tax law as it applies in 2009: a $3,500,000 per person exemption, a 45% top estate tax rate, and a step-up in basis for all assets included in the gross estate for tax purposes. The estimated tax cost of this bill would be $234 billion over 10 years, not exactly chump change, especially in light of current and future federal deficits and the huge total federal debt.

Despite its huge tax cost, this bill would still not do a lot of things that many consider to be important: fully unify gift, estate, and generation-skipping taxes; allow any unused exemption of the first spouse to die to be used by the surviving spouse; provide for indexing, etc. Its passage by the Senate without any changes is thus highly questionable, especially with the raging Health Care debate currently in high gear; and even if a similar bill were to pass in the Senate, the likelihood of a House-Senate conference committee producing a single final bill that could be signed into law this year seems miniscule at best.

However, just because no final bill may become law this year does not mean that decedents dying in 2010 are off the estate tax hook. The reason is that the U.S. Supreme Court has apparently ruled in the past that tax legislation can be made somewhat retroactive, meaning that a bill passed anytime in 2010 could be made effective as of January 1, 2010. (Now that would be a real post mortem tax!)

Is this any way to run a country? Of course not, but it is where we are right now. Keep tuned, because anything can happen at almost any time. As soon as the legislative jury comes back with an estate tax verdict, you’ll be among the first to hear about it.

If anyone has any questions about this tax mess, or for more information, please contact Bob Burton LLB CLU ChFC AEP at 415-369-9990 ext 116.

Here are two timely subjects that should enable you to contact your clients before year-end.

Required Minimum Distributions. Traditional IRAs are all subject to the Required Minimum Distribution (RMD) rules once the IRA owner reaches age 70½ … EXCEPT FOR THIS YEAR. DUE TO THE CURRENT ECONOMIC CLIMATE, RMDs HAVE BEEN SUSPENDED FOR THE YEAR 2009. Most of your clients probably know this, but a reminder from you could stand you in very good stead. Even if a client has already taken a RMD this year without knowing that the requirement has been suspended, it probably occurred fairly recently, so if the RMD was taken less than 60 days ago, it can easily be reversed if desired by rolling it over to a different IRA.

Conversions to Roth IRAs. There are basically only two types of IRAs: traditional IRAs (a tax-deferred environment) and Roth IRAs (a tax-free environment, provided certain rules are met). Beginning on January 1, 2010, the $100,000 “modified adjusted gross income” limitation on the ability to convert a traditional IRA to a Roth IRA will no longer apply. This opens up powerful new planning opportunities for anyone who has a traditional IRA.

The conversion of a traditional IRA to a Roth IRA is a taxable event, but thereafter everything in the Roth IRA, including distributions, will be income tax-free, provided some simple rules (discussion of which is beyond the scope of this blog post) are complied with. Although some clients may conclude that, because of the current income tax consequence, a conversion is not beneficial in their situation, we believe that every IRA holder should at least give it very serious consideration for the following reasons:

1. Timing of the tax payable. The automatic rule for paying income tax on a conversion made in 2010 is 1/2 payable for the tax year 2011 (which means as late as October 15, 2012, with a tax return filing extension) and 1/2 for the tax year 2012 (which means as late as October 15, 2013, with a tax return filing extension). The automatic rule can be altered by making an election on the 2010 return to pay the tax for the tax year 2010 — but both that election and the payment of the tax can be deferred to October 17, 2011 (October 15 is a Saturday), with a tax return filing extension. In other words, there is a large degree of flexibility here.

2. Ability to “recharacterize” (i.e., undo) the conversion. The law provides that a taxpayer who implements a conversion to a Roth IRA during 2010 has until the taxpayer’s 2010 return is due and timely filed (including extensions, i.e., as late as October 17, 2011) to change his or her mind and have the Roth IRA changed back to a traditional IRA. The decision whether or not to do this could well depend on whether the value of the converted assets has increased (probably stick with it) or decreased (reverse it).

The most likely sale that we can help you with in this area involves annuities, either deferred or immediate. Remember, in a Roth IRA, everything, including distributions, should be tax-free rather than just tax-deferred. Tax-free income is always welcomed with open arms!

For more information, please contact Provada at 415-369-9990.