Tax lawyers and accountants expect an influx of work this fall as wealthy clients seek to file estate plans after months of limbo.
Much of the anticipated work stems from the federal government’s inability to make a move on the future of the estate tax, which is levied on property and other wealth passed on to heirs.
In 2009, Congress surprised many by letting a one-year lapse of the estate tax take effect for 2010.
“No one expected it to sunset in 2010,” said Daniel Garrett, senior tax manager at Irvine-based accounting firm Ramirez International. “We figured there would be a patch before then.”
The one-year break was part of a 2001 Bush administration tax law that eased estate taxes for nine years. After that, estate taxes are to revert back to pre-2001 levels in 2011—but not before disappearing entirely for 2010.
Many expect the tax to be reinstated, and be retroactive to Jan. 1 on top of that. But no one is sure.
A sense that something is about to happen is likely to get people who were on the fence about estate planning this year in to see lawyers and accountants.
“We’re expecting a flood of work from our clients as the year comes to a close,” said Tim Kay, partner at the Costa Mesa office of Phoenix-based Snell & Wilmer LLP. “Many would have filed earlier. But the uncertainty about the estate tax rules has led them to hold out.”
Estate planners have spent the year drafting wills and estate plans, unsure about whether an estate tax will be levied on someone who dies in 2010.
Beyond that, the lapse in estate tax rules has complicated other issues associated with wills, including trusts for grandchildren.
“This year has led to a headache for many clients, their estate planners and accountants who have had to tackle ambiguous rules that have threatened to change all year,” Kay said. “You’re not likely to find a professional involved in estates who hasn’t been watching Congress very closely.”
Eyes on Washington
All eyes are on Washington now as the estate tax has come up as part of a plan to keep other Bush administration tax cuts while renewing the estate tax. The proposal could come up for consideration before the November elections.
The House of Representatives tried to pass a bill in 2009 that would have extended the 2001 estate tax cuts and avoided the quagmire of the 2010 lapse.
The House bill passed but didn’t make headway in the Senate as lawmakers took up healthcare reform and other big issues.
“It just quietly died as Congress (had) bigger fish to fry,” Kay said.
For lawyers and accountants who work with wealthy clients, the biggest issue is the possibility of a retroactive estate tax applied to 2010.
“What we are trying to do is prepare them as much as possible,” said Brad Peterson, director at Costa Mesa-based Deloitte Tax LLP’s private client adviser practice.
Accountants and lawyers are tackling another issue created by the absence of the estate tax in 2010—the modified carryover basis rules.
The rules are an income tax issue for heirs of those who die in 2010.
If and when an estate tax is imposed again, some anticipate a series of lawsuits by heirs.
“Many think that a retroactive estate tax is constitutional, but the law is very murky at best,” said Shahzad Malik, chairman of the tax practice at Newport Beach law firm Stradling Yocca Carlson & Rauth. “As a practical matter, how would you collect a retroactive estate tax if Congress did pass it?”
The issue of whether or not the federal government will impose an estate tax this year has led to additional hours for lawyers and accountants.
“There are many attorneys out there who are drawing up two sets of documents in the event that their client may pass away in 2010,” Deloitte’s Peterson said.
Gift Tax
Some have avoided the estate tax uncertainty altogether, thanks to a lowering of the federal gift tax, which is levied on property and other wealth that’s given to family members while the giver still is alive.
Gift taxes didn’t disappear on Jan. 1, but the rate fell from 45% to 35%.
“The gifting tax rate, which is the lowest it has ever been, is a great opportunity for people if they are looking to transfer wealth,” Peterson said.
But some are worried about gifts as well, according to Kay.
“I have a client who is prepared to give a $20 million gift and pay about $6.5 million in tax,” he said. “He’s not willing to pull the trigger until the end of the year when it’s less likely Congress will change the rules on him.”
All of it adds up to a crazy year, according to Malik.
“Ten years from now, when all this stuff settles, lawyers and accountants are going to look back at these old wills and wonder what we were smoking,” he said.
