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.