The following was posed in Crescendo eNotes January 18, 2010, and I though it would be of interest to readers of this blog:
As the first decedents pass away in 2010, executors and their advisors are now faced with great uncertainty. IRS Form 706 Estate Tax Returns will be due in nine months, although nearly all executors request an automatic extension of six months. Therefore, for individuals who pass away in January of 2010, estate tax returns are likely to be filed in April of 2011.Attorney Conrad Teitell testified before the Senate Finance Committee on estate taxes on November 14, 2007. He explained that there are extraordinary differences in the level of estate taxation for the years 2008, 2009, 2010 and 2011. Estate taxes for taxable estates would be moderate in 2008, lower in 2009, zero in 2010 and very high in 2011.
On January 12, 2010, Mr. Teitell again wrote a letter to Chairman Max Baucus (D-MT) and Ranking Member Charles Grassley (R-IA). He noted, "Estate planning is serious business and not a game. Yet a retroactive change in the 2010 estate rules would literally make estate planning a role of the dice." To read the Conrad Teitell letter click here.
Mr. Teitell proposed two actions. First, he suggests that "the carryover basis rules be repealed retroactively." Second, he recommended that changes in estate tax laws be prospective. If the existing law is unchanged, 2010 estates will not be subject to estate tax, but also will not benefit from carryover basis. There is a $1,300,000 exclusion for each decedent and a $3,000,000 exclusion for a surviving spouse, but most assets in excess of these amounts will have a carry-forward basis.
Mitchell Gans is a respected estate commentator and teaches at Hofstra University School of Law. He published an article this week that discusses the constitutionality of a retroactive estate tax law. Mr. Gans "would favor a retroactive approach."
However, he is concerned that under United States v. Carlton, 512 U.S. 26 (1994), the retroactive estate tax compromise may not be upheld. While Carlton is a precedent for allowing retroactivity (similar to the Sec. 2057 rule that was imposed and upheld in Carlton), Professor Gans suggests that a retroactive estate tax could be determined to be a "new" tax. If so, the court may distinguish Carlton and determine that the new tax can not be retroactively imposed.
Professor Gans suggests that Congress should pass a contingent income tax that will be effective for 2010 if a retroactive estate tax is not upheld. He advocates that if "the estate [tax] were determined to be unconstitutional," a legatee would then be required to pay income tax on the inheritance.
Editor's Note: As estates now are entering the probate process during 2010, the situation becomes even less clear. As was discovered by executors in 1976 when there was another attempt to eliminate carryover basis, most estates will have great problems in establishing or proving basis for many assets (after a great outcry from executors and estate planners, the 1976 carryover basis law was repealed retroactively in 1980). But with two or three Democratic Senators dramatically behind in the polls and thus unwilling to vote for an estate tax compromise, it seems unlikely that Sen. Baucus and Sen. Reid will be able to gather the 60 votes necessary to pass an extension of the 2009 estate exemption and tax rate. As a result, the whole picture may remain unclear for most or all of 2010.