The Wall Street Journal recently reported that Congress is contemplating a “prepaid” estate tax.  It is unclear exactly how such a model would work, but one scenario would allow people to create “prepayment trusts” in which they’d put assets into the trust for five years and pay a 35% capital-gains tax on the gains of the assets.  Then, when they die, the assets would presumably pass to heirs without any estate tax.

The benefit for the government is the creation of much-needed revenue now, but a big drop-off in collections later.

Could this work?  Possibly, but not for everyone.  People with liquid assets who can easily pay the taxes on their trusts would certainly benefit.  But for the average small-business owner with little to no liquid assets, it would obviously be more difficult.

Of course, we’ll be keeping an eye out for more developments on this.

As my readers are aware, all of us in the estate planning community have been following the mess that Congress created by not passing any sort of law to set the estate tax limits at a permanent level.  As most people now know, the estate tax was repealed effective, January 1, 2010, but is scheduled to be reinstated in 2011 at a rate of 55%.

As a result, many States have taken action and legislatures are introducing bills that would require all estate and trusts to be interpreted as if someone died on December 31, 2009, unless Congress acts to clarify the estate tax law.  On January 12, Virginia was the first state to propose taking action with Maryland, New York and Georgia following closely behind.  The point of this legislation is to carry out what the deceased intentions were and to provide closure and a clear answer to families who are in disagreement where a recent death could result in litigation.  As we discussed in previous blogs an unintended consequent of Congress not acting was there is no “applicable exclusion amount” in 2010.  As a result many estate documents could unintentionally disinherit a spouse or could unintentionally not create a “bypass” trust that will save estate taxes, if any, upon the surviving spouse’s death.  These bills could pass by the end of February and made retroactive to January 1 unless Congress acts.  Federal law always takes precedent. 

*Footnote:  Missouri, the District of Columbia, South Dakota, Minnesota, Tennessee, Indiana, Florida, Ohio, Wisconsin and today Delaware are all drafting legislation to address estate planning documents for decedents dying in 2010 in their respective States.

Also, with the release of the budget yesterday, it appears the office of OMB has indicated that the 2009 level would apply in 2010.  The Wall Street Journal also reported that President Obama has proposed reinstating the estate tax to the levels of 2009 with a $3.5 million exemption with a 45% marginal rate to be extended permanently.  There are different income tax proposals which would eliminate some of the 2001 tax cuts at top rates.

Stay tuned.  I will be writing more on this subject as news breaks.  If you have any questions about your own specific situation or estate planning documents, please send me an email.

Serves me right, I go on a wonderful 10 day vacation from work and look what happens:  Congress finally passes an estate tax bill.  The full story is that the House has passed a bill that would permanently FREEZE the applicable exclusion amount (i.e., the amount that passes free of Federal estate tax) to 3.5 million and FREEZES the rate at 45%.  The Senate will now take up the passed House bill.  Then, if the Senate makes any changes, it goes to a conference committee.
 
The good news:  Something may happen before the end of this year to end the uncertainty.  AND the bill that passed the House does not change any other aspect of the estate tax laws (other than repealing carryover basis, which would have been a disaster anyway).  Therefore, GRATS, valuation discounts and other estate planning tax reduction techniques are still viable.
 
The bad news:  Anything can happen and NOTHING is permanent.  Hence, Congress can still act before the end of this year to eliminate or restrict GRATS and valuation discounts.  Clients should not be lulled into a false sense of security.  Action should be taken as soon as possible before Congress closes the door on these techniques.

A recent article on TheHill.com, Debate Over Estate Tax Likely to Wait Until 2010″, suggests that a split among Democrats and a busy fall agenda is likely to have lawmakers hold off this year on debating the future of the estate tax, even though it is set to expire at the end of the year.

Many experts forsee that the most likely scenario for estate tax reform is a one-year extension on current estate tax laws which would buy Congress time to make broader reform in 2010.

We will, of course, be following this closely!