Isaacson Isaacson
Sheridan & Fountain, LLP
101 W. Friendly Ave., Suite 400
Greensboro, NC 27401 
(336)  275-7626
 
 June 17, 2010
photo of Desmond
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The following alert is from Desmond Sheridan.
 
Estate Tax Confusion Continues
 
            Despite the predictions of many (including me) to the contrary, Congress has still done nothing to fix the estate tax situation.  The 2010 death of Dan Duncan, a billionaire from Texas (where else?) has made the situation even more complicated.
 
Background
 
In 2001, Congress and President Bush adopted a bizarre plan for the elimination of the estate tax:  a gradually increasing exemption, a decreasing tax rate, the elimination of the estate tax in 2010 and the complete reinstatement of the estate tax to 2001 levels in 2011.  At the time, Congress and the President would have been glad to simply eliminate the estate tax, but budget scoring rules in effect at the time required a level of revenue neutrality.  Therefore, the adopted scheme allowed Congress to comply with the budget scoring rules but still take advantage of a headline reading "Estate Tax Repealed."
 
They Let It Happen
 
Ever since the enactment of the estate tax "repeal" in 2001, planners have said that the law as passed in 2001 will never be allowed to fully take effect.  That is, Congress will either reinstate the estate tax on some basis or will simply make the repeal permanent.  However, Congress let the tax lapse at the end of 2009.  Planners then predicted that Congress would quickly address the issue in 2010.  So far, nothing has happened. 
 
What It Means.
 
This all means that, under current law, for decedents dying in 2010, there is no federal estate tax.  The news is not all good because the 2001 law also changed the law regarding income tax basis at death.  Previously, all capital gains in a decedent's assets were eliminated at death.  Under the repealed estate tax rules, only the first $1,300,000 in gains are eliminated.  So for example, a person with $3,000,000 in assets (and no basis) who died in 2009 would pay no estate tax (because the decedent's asset levels are under the 2009 lifetime exemption).  Also the decedent's heirs would pay no capital gain tax on the subsequent sale of the decedent's assets.  The same person dying in 2010 would pay no estate tax, but the decedent's heirs would have tax on $1,700,000 in capital gain upon the sale of the decedent's assets ($3,000,000 in gain less the $1,300,000 step up).  This means that although some people would obviously pay less tax (because of the estate tax elimination), others would actually pay more tax (because of the change in basis step up).  Of course, heirs could elect to not sell property to avoid the capital gain tax.  It's great news for an estate like Mr. Duncan's - his estate tax would far exceed any future capital gain tax, but bad news for smaller estates.  As things stand now, the federal estate tax on his $9 billion estate is zero.
 
What's Next?
 
            Congress could still act this year.  If so, the betting is that Congress and President Obama would restore the estate tax to its 2009 levels.  Of course, there are decedents (like Mr. Duncan) dying during the period from January 1st until the enactment of the new law.  Congress could make the law retroactive to January 1st.  There will be an interesting constitutional test as to whether such a change can be made retroactively.  While the U.S. Supreme Court has previously upheld retroactive changes in tax rates, it is not clear that Congress can retroactively impose a whole new tax.  Presumably, Mr. Duncan's estate would lead the fight.  With billions in tax at stake, it could outspend the IRS on the issue.  Given the inaction so far, Congress could just do nothing, write off 2010 and let the tax reinstate itself in 2011 and forward.
About the Writer

Desmond G. Sheridan is a partner in the Greensboro law firm of Isaacson Isaacson Sheridan & Fountain, LLP and is a certified public accountant.  His practice areas are business transactions, tax, corporations, limited liability companies, commercial real estate and estate planning.  Sheridan has served on the Board of Directors of the North Carolina Association of Certified Public Accountants and has been recognized as a "Best Lawyer in America," a North Carolina "Super Lawyer" and a member of the "Legal Elite" by Business North Carolina.  He has given numerous continuing education presentations to CPAs and attorneys.

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