Baltimore lawyer Kenneth Aneckstein has had a few mega-millionaire clients die in recent months. That means their families are expected to save millions of dollars because the federal estate tax no longer exists — at least for now.
But Aneckstein warns heirs to keep some money on hand for the IRS, just in case. After all, Congress could pass an estate tax and make it retroactive to the beginning of the year. "We're not out of the woods yet," he says.
The resurrection of the federal estate tax has again become the talk of estate planners since the death of New York Yankees owner George Steinbrenner this month. Because of congressional inaction last year, the estate tax was allowed to lapse for this year only. It comes back next year, under old rules that are far less generous to families.
The timing of Steinbrenner's death this year — instead of next — saved his estate an estimated $518 million in federal taxes. Other newly departed billionaires with larger estates have avoided even bigger tax bills.
This is a huge mess that could have been avoided. Legislators knew for years that the estate tax would temporarily expire and didn't fix it. Now, months of their inaction have caused a lot of uncertainty and created a planning nightmare for Maryland lawyers, financial advisers and their clients.
"It's a difficult situation. We are halfway through the year and still don't know what will be the controlling law," says John Cogar, a senior vice president with PNC Bank in Baltimore.
The conventional wisdom is that the federal estate tax will be back. The question is when and what will it look like.
Legislators recently introduced two proposals to reinstate the tax. One would allow an individual to shelter as much as $5 million from the estate tax — compared with $3.5 million in 2009 — and tax estates worth more at a rate of 35 percent.
The other wouldn't tax the first $3.5 million of an individual's estate. After that, the tax rate would be 45 percent on estates of up to $10 million, gradually rising to 65 percent on estates worth more than $500 million.
Publicity over the Steinbrenner case will likely put pressure on Congress to make any estate tax retroactive to the beginning of this year, says Mark Luscombe, a principal tax analyst with CCH, a provider of tax information. People will "view it as a loophole needed to be closed," he says.
Others aren't so sure. "The longer it goes on, the less likely it will be retroactive," says Stephen Hartnett, associate director of education with the American Academy of Estate Planning Attorneys.
Moreover, lawyers say, the heirs of billionaires who died this year would launch a protracted legal battle if Congress tried to tax them now.
Clearly, many want Congress to act — soon. Last week, former Treasury Secretary Robert Rubin and AFL-CIO president Richard Trumka and heiress Abigail Disney urged Congress to reinstate the estate tax act before leaving for an August recess.
But Congress may want to avoid tackling this thorny tax until after the November elections, some policy watchers say. And the results of the election could affect how generous or stingy a new estate tax becomes.
If Congress continues to delay, though, beneficiaries may have to wait longer to get their full inheritance, Aneckstein warns.
Executors typically spend six months or so after a death paying bills and then distribute what's left to heirs, he says. But if executors don't know whether there will be a big federal estate tax bill or not, they might hold funds back for taxes, Aneckstein says.
And if waiting longer for an inheritance doesn't upset people, next year's return of the estate tax likely will.
Without a fix, the estate tax will re-emerge under old rules that are sure to snag more than the ultra-wealthy. An individual next year will be able to shelter only $1 million from the tax — or $2 million for married couples — and the top rate will effectively jump to 55 percent.
"One or two million, that's a house, an insurance policy and a 401(k) for everybody who has worked for 40 years and saved," Aneckstein says.
Maryland lawyers and financial advisers say there are some steps people can take to protect themselves during this uncertainty.
First, make sure your estate documents are up to date and still reflect your wishes.
Dennis Suckstorf, a senior financial planner at Financial Advantage in Columbia, says his firm began reviewing clients' estate documents more than a year ago to make sure "they were flexible enough to be used whether the estate tax went up or down."
A new Maryland law can also help you if your documents haven't been revised for years.
Wills often refer to the federal estate tax exemptions when divvying up assets among a spouse and children. But what happens when there is no federal limit? Lawyers worried that some relatives might be unintentionally disinherited this year if a will hasn't been updated.
This year, Maryland along with eight other states passed legislation to avoid such problems.
Now, if an old will in Maryland refers to the federal estate tax limits, the presumption is that the deceased meant those in the 2009 law. And a beneficiary or executor could ask a court to determine whether the deceased intended something else.
Some lawyers and advisers are also recommending that people reduce the size of their estate, given that it might be subject to taxes in the future. One way to do that is by giving away money now.
You can give up to $13,000 a year to an individual without any gift-tax issues. And Suckstorf says many of his clients are writing big checks to colleges to pay the tuition for grandchildren, again without triggering gift taxes.
"Doing that reduces their estate and gets money to younger generations," he says.
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