Wealth Law Blog : Oregon Asset Protection Lawyers & Attorneys : Samuels Yoelin Kantor Seymour & Spinrad Law Firm : OR Estate Planning, Fiduciary Litigation

Dan Duncan was the son of an oil-field roughneck. From humble beginnings, Mr. Duncan started his own oil and gas business in 1968 with $10,000 and a truck. Over the years, Duncan grew that business into a prosperous venture which is now known as Enterprise GP Holdings L.P., a publicly traded company (Ticker EPE). At his death on March 28th of this year, Duncan had an estimated net worth of $9 billion and was ranked No. 74 on Forbes list of the world’s richest individuals. It appears that Duncan is the first American billionaire to pass his wealth free of the estate tax since the modern estate tax was originally imposed in 1916.

As we have previously discussed in WealthLawBlog, the federal estate tax is on a one-year hiatus in 2010. In 2009, the first $3.5 million in net worth was exempt from the estate tax, with a top tax rate of 45%. In 2011, the estate tax returns with only a $1 million exemption and a top rate of 55%. Hence, if Duncan had died three months earlier or nine months later, his estate would have been liable for billions in federal estate taxes. 

However, Duncan’s death is not entirely tax free. One quirk in the 2010 estate tax law is an anomaly referred to as “carryover basis.” Generally, under the modern estate tax regimen, while estates are subject to the estate tax, the assets that are subjected to the tax receive a “step-up” in their tax bases equal to the value of such assets as of the decedent’s date of death. This means that the heirs receiving these assets can sell those assets and pay capital gains taxes on only the appreciation in the value of those assets exceeding the stepped-up bases. In 2010, assets receive no step-up in basis except for a limited step-up of $3 million for assets passing to a surviving spouse and $1.3 million for assets passing to other heirs.

In the case of Duncan’s estate, except for these limited exceptions to the step-up basis rule, Duncan’s heirs will inherit the assets in Duncan’s estate with carryover tax bases. If the Duncan heirs sell these assets, then they will pay capital gains taxes on the difference between the sale price of the assets and Duncan’s original basis. Based upon the presumption that much of Duncan’s estate consists of his company shares with a very low basis, the ultimate capital gains taxes payable by Duncan’s heirs could be substantial. Nevertheless, even if the taxes are paid at the increased capital gains rate for 2011 of 20% (increasing to 23.8% in 2013), these taxes are certainly much less than the estate tax rates of 45% to 55%. 

The bottom line: death and taxes are still inevitable. It’s only their timing and severity that varies.

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As reported in a recent article in TheHill.com, bipartisan negotiations over a potential compromise relating to the federal estate tax have broken down. According to Senate Minority Whip Jon Kyl (R-AZ), Senate Democrats are not allowing any legislation to reach the Senate floor which is not supported by a majority of Senate Democrats.

President Obama has previously proposed that the estate tax be continued at 2009 levels, with a total exemption from the estate tax of $3.5 million (potentially $7.0 million for a married couple) and with a top bracket of 45%. While the terms of the failed compromise were not released publicly, it has been reported from a number of sources that the compromise would begin at President Obama’s proposed levels, but then the exemption would increase over a number of years to $5 million with a 35% top bracket. In order to make the reduction deficit neutral, the Senate proposal would have also allowed individuals to prepay the estate tax during their lifetime at a rate of 35%. Presumably, this prepayment proposal would have been accomplished through some type of a “prepayment trust,” in which taxpayers would transfer assets to an irrevocable trust and pay the estate taxes in the year of transfer.

If Congress takes no further action on the estate tax (a possibility which I have discussed in a previous WealthLawBlog article), the estate tax will remain “repealed” for the balance of 2010, but then will return on January 1, 2011 with an exemption of only $1 million and a top bracket of 55%. Some Senators have stated publicly that they are in support of a reduced estate tax exemption. For instance,

Sen. Bernard Sanders (I-Vt.) recently stated: “The idea that we would make significant exemptions within the estate tax to give more tax breaks to the top three-tenths of 1% is nauseating. I will do everything I can to stop that.”

With approximately 11 “legislative weeks” for Congress to accomplish a “fix” to the estate tax, it seems to me that two things are becoming increasingly likely. First, the estate tax will likely remain “repealed” for the balance of 2010. Second, as the champagne flows and 2011 is ushered in, the “new” estate tax will return with the $1 million-55% parameters.
 

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Now that Congress has repealed the estate tax for all or some portion of 2010, Oregon married couples need to rexamine whether or not their estate plan will work as they intended. 

For any couple with a net worth over $1 million, it is common to have a tax plan which divides the marital property when the first spouse dies. 

These plans typically provide that the portion of the decedent’s estate that is exempt from estate tax will pass to pass to a tax exempt trust, often called the “credit shelter trust” and the balance passes to the surviving spouse or a marital trust. In situations with children from a prior marriage, it is very common for the beneficiaries of the credit shelter trust to include the children from a prior marriage as beneficiaries; whereas, the assets passing to the surviving spouse will not include those children.

For example, if the first spouse died in 2009 with a $5 million estate, $3.5 million would be transferred to the credit shelter trust, because that was the amount that was exempt from federal estate taxes, and the $1.5 balance will be transferred to the surviving spouse or placed in a trust for the benefit of the surviving spouse. 

However, if the first spouse dies in 2010, while the repeal is in effect, all of the first spouse’s estate will pass either to the credit shelter trust or to the marital trust, depending on the wording in the estate plan document. If there are children from a prior marriage, it will be important to know how the estate will be split. If all of the decedent’s estate passes to the surviving spouse, then the children’s shares may be significantly reduced. However, if the children are the sole beneficiaries or co-beneficiaries of the credit shelter trust, this could significantly reduce the amount of assets available to the surviving spouse. 

Further complicating this issue are the following:

• Oregon’s Inheritance tax exemption of $1 million significantly complicates the trust allocations and the beneficiaries who may inherit trust property.
• The federal income tax carryover basis rule changes apply to 2010 Oregon estates which may cause an unexpected income tax when inherited property is sold.
• 2010 estates over $1.3 million will have to file an informational return with the IRS

Because of the 2010 law changes, every couple with a net worth in excess of $1 million should contact their estate planning attorney to review their current plan to determine how their estate would be handled if a spouse died in 2010 while the federal estate tax is repealed.

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On January 20, 2010, the U.S. Senate took an unusual procedural step in placing HR 4154, the “Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Bill of 2009” directly on the Senate calendar.  In taking this action, the Senate is in the position to completely bypass the Senate Finance Committee, which is the main tax-writing committee in the Senate. As previously reported by my law partner, Jeff Cheyne, the estate tax expired on December 31, 2009 after the Senate failed to act to approve legislation that would have extended the estate tax. 

HR 4154 was passed by the House of Representatives on December 3, 2009 by a vote of 225-to-200. The legislation would permanently extend the current exemption for estates up to $3.5 million per individual and $7 million for married couples and set a maximum rate of 45 percent on estates above this threshold. If passed by the Senate, the legislation would, in effect, retroactively restore the estate tax effective as of January 1, 2010.

I welcome your comments and questions.

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On January 1, 2010, the federal estate tax was repealed for one year (2010) unless and until Congress decides to change the law. We don’t know how long the repeal will last, but the fact that the federal estate tax has been repealed for some part of 2010 complicates estate planning for everyone.

Several members of Congress have indicated that these complications will be resolved quickly, but I remain skeptical. Currently, there are four possible outcomes:

• First, Congress quickly enacts an extension of the 2009 law ($3.5 million exemption and full basis step-up) retroactively. How many times have we seen Congress act quickly when the Democrats and the Republicans are so polarized?
   
• Second, Congress passes a permanent extension of the 2009 law, but makes it prospective only. This is the bill that was passed in the House, but 60 Senators have to agree. If it is prospective only, gap legislation will also have to be passed to cover the period when repeal was in effect.     

• Third, Congress enacts a more permanent reform with a higher exemption amount, and it will likely be prospective only. Some senators would like to raise the exemption to $5 million and add some other changes to permanent legislation. Other senators would prefer the next option of the return to the $1 million exemption. At this point neither side has the 60 votes necessary. The longer Congress takes to pass a reform bill, the more likely it will not be retroactive.
  
• Fourth, Congress does nothing and the $1 million exemption returns in 2011.  Unfortunately, political and fund raising motives may result in this outcome.

In the meantime, taking advantage of the estate tax and generation skipping tax repeal will be an important planning opportunity for high net-worth individuals and their advisers. Accountants, attorneys and financial advisors will need to learn the details of the new modified carry-over basis rules since they are applicable to all estates. 

This truly is a mess.  Hopefully, Congress will act responsibly to clean it up.

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On December 16, 2009, the Wall Street Journal reported that the Democrats’ attempt to extend the Federal Estate Tax exemption of $3.5 million into 2010 has been blocked by the Republicans. Senator Max Baucus is quoted as saying, “We clearly will work to do this retroactively, so that when the law is changed, it will have retroactive application.” 

The Republicans believe that the repeal should be allowed to take effect as provided under current law, and Senator John Kyl (R, Arizona) stated, “The problem doesn’t have to exist. They’ll just leave the existing law alone and let the rate go to zero, where everyone wants it anyway.”

 Thus, as the law stands today, Federal Estate Tax will be

• zero in 2010;
• with certain exceptions the tax basis step-up will be repealed for 2010;
• The estate tax exemption will return to $1,000,000 in 2011.

It is an interesting and continuing revelation about the extent of the massive gridlock in the current Congress when the Democrats could not even muster enough votes to pass a mere extension of the $3.5 million exemption for the first three months of 2010.

It remains to be seen whether or not enough votes can be mustered to make any estate tax changes in 2010. If the Senate could not pass an estate tax bill with a 60 vote majority, I am skeptical that it will get accomplished in 2010. 

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Since the passage of the Economic Growth and Tax Relief and Reconciliation Act in 2001, clients and practitioners have been waiting for years for Congress to determine what happens to estate taxes after 2009. The Republicans hoped to completely repeal the estate tax. The Democrats wanted to keep the estate tax but raise the amount that is exempt from estate tax. 

On December 3, 2009, the U.S. House of Representatives passed the Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Act of 2009 a/k/a HR 4154. (For a copy of HR 4154 click here),  which is their vision for federal estate tax reform. What does HR 4154 do?

• HR 4154 makes the federal estate tax exemption of $3.5 million permanent, however, there are no inflation adjustments;
• The zero estate tax for 2010 is repealed;
• The basis step-up provisions which have traditionally been part of the federal estate tax law have been reinstated for 2010; and 
• The estate tax rate is made permanent at 45%.

The House vote to approve the bill was 225 to 200. No Republicans supported the bill. Speculation continues that any estate tax reform legislation that occurs within the next few weeks will ultimately apply to 2010 only, and the more permanent issues will be decided next year. The stage now turns to the Senate, and it is expected to pass its own version of estate tax reform.
 

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On October 22^nd, a bill to permanently extend the federal estate tax for 2010 and beyond was introduced by a bipartisan group of Congressional Representatives. All four Representatives are also members of the House Ways and Means Committee – the tax-writing committee in the House. The bill would rescind 2010’s scheduled repeal of the estate tax. In addition, over the next ten years, the bill would increase the federal estate exemption amount and reduce the top estate tax rate as indicated in the table set forth below:

After 2019, the $5 million exemption amount would be indexed for inflation. While the introduction of such legislation is often the last time it sees the light of day, the fact that a bipartisan group (two Democrats and two Republicans) introduced the legislation, combined with their common membership on the Ways and Means Committee, may give the bill some traction. Ultimately, Ways and Means Chairman Charlie Rangel will be instrumental in deciding the nature of any legislation that moves out of the committee. Stay tuned!

I welcome your comments and questions!

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One of the most surprising revelations that many of my clients experience is the fact that estate/inheritance taxes will be due upon their death, unless they do some planning.  These clients have been convinced that estate/inheritance taxes only affect the rich, and since they do not perceive themselves as rich, they have nothing to worry about.

What these clients don't realize, until our initial meeting, is what all is included in their taxable estate.  The asset most often left out is proceeds from life insurance.  If you have a million dollar life insurance policy, and you also have other assets, you will pay inheritance tax in Oregon, which has only a $1 million exclusion.

The second asset most often forgotten is retirement plans.  These amounts are not only included in your taxable estate, and therefore subject to the estate tax, but they are also, without proper planning, potentially subject to income taxes.

The third asset that people seem to forget when calculating their taxable estate is equity in their real property.  This one may seem more surprising than the others, but it happens quite frequently.

Fourth, there are assets that client's have received from their parent's estate planning, such as family limited partnership interests, that they tend to forget about.

For those who don't relish the idea of paying more taxes than is required (and I have yet to meet someone who does),  I recommend having a long discussion with your estate planning attorney about what is included, and what the estate tax exemptions are currently (see earlier posts about changes in the federal estate tax exemption).

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Caution! The estate tax has a hole in it. Not to worry – a bit of legislative spackle is on the way. 

The estate tax (with its current $3.5 million exemption) is just a few months away from expiring – albeit for one year. Then, if Congress fails to act, the estate tax will reappear in 2011 with a $1 million exemption. This odd scenario exists because of the 10-year expiration of the 2001 tax bill passed early in the Bush Administration.

A recent article in the publication The Hill quotes experts and Congressional staffers saying that Congress will enact a one-year “patch” which will extend through 2010 the current $3.5 million estate tax exemption and tax rate of 45 percent. The congressional staff members indicate that because Congress is busy dealing with healthcare reform, a long-term decision for the estate tax will have to wait until 2010.

Both the Obama administration and Senate Finance Chairman Max Baucus have proposed making the $3.5 exemption and 45 percent top rate permanent. However, Republicans and some conservative Democrats have suggested a $5 million exemption and a top rate of 35 percent. With such splits present not only between the parties but also with the Democratic majority, a one-year “spackle” approach might lead to the scenario described in the blog article by my co-blogger and law partner, Ted Simpson. Under this scenario, election-year gridlock and inaction by Congress could lead to the return of the $1 million exemption in 2011. Spackle may have its limits.

I welcome your comments and questions.

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In the August 7, 2009, BNA Daily Tax Report, it was noted that Rep. Brady has proposed a permanent repeal of the estate tax.  Do you remember that old Saturday morning cartoon, I'm Just a Bill?  Well, this bill is going to continue to sit on Capitol Hill and will never become law.  You heard it here first.

So, what is to become of the repeal of the estate tax?  Most of those in the know seem to say that we are going to stay with the current $3.5 million exemption.  They are probably right.  However, I think it is dangerous to count on that happening.  Let me spell out for you a less probable, but possible scenario.

 Under current law, in 2010, the estate tax essentially goes away.  Then, in 2011, it comes back with a vengeance, at a $1 million exemption (thank you Senator Bird).  When this process was set up eight years ago, it was thought that there was no way a tax increase would be allowed, so the repeal would go on, regardless of the Bird Rule.  However, now we are in an economic crisis, and the government needs money. 

Many believe that the congressional leadership don't want to see 2010 with the unlimited exemption, so we can expect finality this year.  It is possible, however, that the they will just punt this year.  With health care taking up the entire agenda lately, the congressional leadership could just extend the $3.5 million exemption for one year while they consider the matter.  They would likely get broad suppport for this extension.  Then, next year, they could decide that Bush's plan was best after all, and just let the Bird Rule apply.  We would be back at a $1 million exemption without a vote for a tax increase.

You may be thinking the congressional leadership wouldn't risk this because it affects too many of the voters, but keep two things in mind.  First, because of the recession, less people would be affected as less people will have taxable estates.  And second, the government needs money to finance the change America voted for.

Now, I agree this is not the most probable scenario.  But, it is at least possible, and because it is at least possible, we should consider it in our estate tax planning. 

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