WHAT IS HAPPENING WITH ESTATE TAXES?

Would it be a good idea to die in 2010 to avoid estate taxes? This is a question that we cannot yet answer.

Congress is leaving behind a big tax mess. Many key issues remain unresolved for now. Although the House approved extensions for a group of expiring tax breaks, the Senate got bogged down in debate over health care overhaul, preventing it from tackling other must-do bills before year-end. The gridlock could lead to a train wreck on taxes in 2010. Not only will unfinished business have to be taken care of, but Congress will be staring at another major deadline because the Bush tax cuts will expire at the end of the year if nothing is done.

This session’s biggest failure is inaction on the estate tax. We are currently in limbo.

With no change in current law, the estate tax will disappear in 2010, then reappear in 2011 with a top rate of 60% and a low $1-million exemption. The generation-skipping tax will also end for a year, and the gift tax lives on but the top rate falls to 35%. A big problem as the law now stands is that some heirs of people who die in 2010 will owe capital gains tax when they sell inherited assets. Current law, which steps up the basis for inherited assets to the date-of-death value, is replaced by a convoluted system that starts with the decedent’s income tax basis. Executors are allowed to increase the basis of inherited assets by up to $1.3 million. So if they do not change the law it is a good estate planning tool to die this year.

Everyone in the estate tax business felt that some type of resolution would have been reached by now. This is a nightmare.