Fate of estate tax worries planning lawyers

WASHINGTON — Estate planning lawyers are increasingly worried that Congress may not act on estate tax reform before the estate tax repeal expires at the end of 2010. “The current state of the law is clearly unstable,” said Ann Lesk, a partner with New York law firm Fried Frank Harris Shriver & Jacobson LLP. “It is very difficult for people with estates of between $2 million and $10 million to do rational planning, because the amount of their tax liability could vary dramatically based on what year they die,” said Ms. Lesk, who works with trusts and estates. Estate planners have been assuming until recently that Congress would enact permanent estate tax reform, she said. Under the Economic Growth and Tax Relief Reconciliation Act of 2001, the estate tax will be repealed in 2010. But that provision itself will be repealed at the end of 2010, when EGTRRA expires. Inherited property In addition to the difficulty in planning around that provision, many taxpayers who inherit property from someone who dies in 2010 will be caught unawares by a provision in EGTRRA that changes the income tax treatment of inherited property, Ms. Lesk said. Currently, the cost basis for inherited property is stepped up to current market value, allowing heirs to sell the property immediately without paying capital gains tax. Under EGTRRA, only a limited amount of property will receive a stepped-up cost basis. Even if estate tax returns do not have to be filed, heirs will have to establish the cost basis of inherited property, either by filing information returns, or by demonstrating the property’s historical basis, Ms. Lesk said. “It’s going to be really ugly,” she said. Estate tax lawyers also are concerned that proposals that have been made in Congress in prior years sought to repeal deductions for state estate taxes, said Joshua Rubenstein, co-managing partner of Chicago law firm Katten Muchin Rosenman LLP. “The federal reform looks only at fixing the federal system,” he said. “They pay for the federal reduction off the backs of the states, by taking away the deduction for state estate taxes. That aggravates the problem of disparity of treatment, depending on where you live in the United States.” Another trend in estate planning is that people from countries outside the United States increasingly are using U.S. trusts to leave assets to heirs who live in the United States, Ms. Lesk reports. Holders of U.S. assets that generate income subject to U.S. tax are finding that they can transfer assets without estate or gift tax liability if the assets are held in U.S. trusts. Advantage in some states “If I’m a non-resident alien but my children are [living in the United States], the non-resident alien can create trusts not subject to U.S. estate or gift tax forever if created in the right jurisdictions,” such as Delaware, New Jersey, South Dakota and other states that have repealed laws against perpetuities. Ms. Lesk said. Previously, laws prohibited trusts from being passed on for more than a certain period, typically 100 years. “It can be a very large transfer tax-sheltered piggy bank for the family,” Ms. Lesk said. Increased use of such trusts is being brought about by the fact that there are “more people with more money and cross-border issues than there used to be,” she said. “Some of it you can probably write down to globalization of almost everything,” Ms. Lesk said.