LawyersUSA

WASHINGTON – For Washington lawmakers seeking to implement estate tax reform before taxation rates are reset – costing some beneficiaries more than half the value of inherited estates in taxes – time is running out.

Despite the fact that there is less than one year left to enact legislation before a one-year repeal of the estate tax in 2010, followed by a reset that would roll the exemption back to $1 million and raise the tax rate to as much as 55 percent, Congress has yet to act. Though experts say lawmakers seem poised to come to some compromise that will keep rates below 35 percent and still allow the government to collect inheritance tax revenue in 2010, lawyers said the slow pace of reform has been tough on them and their clients.

"If years ago you talked to 100 estate planning attorneys, no one would have said that we'd get to 2009" without estate tax reform, said Bernard A. Krooks, founding partner of Littman Krooks LLP, a New York law firm.

Dennis I. Belcher, a partner at the Richmond, Va., office of McGuireWoods, said the uncertainty in the law makes planning a challenge.

"In my meetings with clients, it is extremely difficult for me to tell them what they should be doing," he said.

Estate tax roller coaster

Since 2001, estate planning lawyers have taken into account annual fluctuations in the estate tax exemption and tax rates under the Economic Growth and Tax Relief Reconciliation Act of 2001.

The complex law essentially established a gradual decrease in the overall highest estate tax rate from 55 to 45 percent between 2001 and 2009, while raising the exemption amount from $675,000 to $3.5 million during the same period. Then in 2010, the law would repeal the estate tax for one year, before rates and exemptions reset to the pre-2001 levels of 55 percent and $1 million.

The conventional wisdom was that Congress would act in the years after the passage of the law to establish a new formula before the 2010 reset. And though lawmakers have held hearings on the matter as recently as this month and proposed several estate tax reform proposals, no new law has been passed.

But lawyers aren't betting that 2010 will be an inheritance tax-free year, a move that would cost the government billions of dollars in revenue.

"Everything that I have heard in Washington is that Congressmen and Senators have all said that the goal is to get this done prior to 2010 so they don't lose the revenue for that year," Krooks said.

At a hearing on estate tax reform, Senate Finance Committee Chairman Max Baucus, D-Mont., said the time to act is now.

"A Chinese proverb says: 'Planning lies with men. Success lies in Heaven,'" Baucus said. "[But] whether you can leave something to your kids should not be entirely up to heaven, and estate tax law should not be entirely a matter of chance."

In March, members of the Senate gave a clue as to which way they were leaning on the issue in their budget resolution. The approved measure included a non-binding amendment that would freeze the estate tax at 2009 levels, meaning that $3.5 million worth of an estate would be exempt – $7 million for a couple – and the rest would be taxed at a 45 percent rate.

A number of other proposals were put forward that would have been far more generous to beneficiaries, with exemptions ranging from $5 million to $15 million, and taxation rates ranging from 35 percent to as low as 15 percent.

But without a concrete legislative proposal on the table, estate tax reform likely won't likely come until the next president takes office.

Holding pattern tough on lawyers

The Senate Finance Committee held the third in a series of recent hearings on estate tax April 3, where attorneys and other experts gave views on what – besides a change in exemption and tax rate levels – an estate tax reform package should include.

Shirley L. Kovar, a shareholder at the San Diego office of Branton & Wilson, who chairs the Transfer Tax Committee of the American College of Trust and Estate Counsel, said any reform must include "portability" of estate tax exemptions to spouses.

Under current law, if someone dies, leaving the estate to the surviving spouse, his or her estate tax exemption disappears. If, for example, the exemption is $2 million, when the surviving spouse dies, the estate would have only a $2 million exemption. If both died at the same time, each would have the exemption, totaling $4 million.

"With portability, a married couple would no longer have to create a bypass trust upon the death of the deceased spouse," Kovar said.

Belcher urged lawmakers to adopt a four-year estate tax deferral for closely-held businesses, followed by a 10-year installment payment provision. That would protect many family businesses from going under in the aftermath of the death of a family member.

"Without the benefit of an installment payment plan, successors would have to liquidate businesses in order to raise the funds necessary [to pay taxes], and it would come at the worst possible time," he said.

All the uncertainly has made the jobs of estate planning and tax attorneys tougher.

"It puts you in a tough spot," Krooks told Lawyers USA. "If a client comes to you with a $3.5 million estate, what do you tell them? Is it taxable or not?"

In his testimony at hearing before the Senate Finance Committee in November, Conrad Teitell, a principal at the Connecticut office of Cummings & Lockwood, was more direct.

"With all due respect to members of both parties, the mood of the country on this issue … is that people are fed up with the Congress's inability to resolve [it]," Teitell said.

Questions or comments can be directed to the writer at: kimberly.atkins@lawyersusaonline.com