Estate planning is certainly no picnic

It was always tough enough to make sense out of one’s estate planning. Then along came the politicians with the suggestion of repealing the whole mess — a good idea, indeed, on its face. But as usual, Congress managed to garble this up, just like about everything else it sticks it grimy paws into.

Legislation enacted several years ago did accomplish a total repeal, but only for the 2010 year. Unless further action is taken, a return to the bad old days of estate tax complexity comes in 2011 and beyond. Overlay the impending 2008 election on this mess, and you have a true nightmare shaping up for the near term.

The staff of the Congressional Joint Committee on Taxation recently prepared a study (Joint Committee on Taxation, JCX-23-08) entitled, “Taxation of Wealth Transfers Within a Family: A Discussion of Selected Areas for Possible Reform.” Many of you should find its contents of interest.

Here are some of the basics which prevail under present law: the estate tax exemption amount (what used to be referred to as the “unified credit”) has been gradually increasing — to a level of $3.5 million for 2009 decedents; the (life time) gift tax exemption has remained at the $1 million level; an heir’s basis in inherited property generally equals the property’s fair market value at the date of the decedent’s death.

The Senate Finance Committee is in the midst of exploring via public hearings the current system of wealth transfer taxation, and possible changes to or replacements of that system. JCX-23-08 examines potential reforms to the present partially unified credit, and issues associated with taxpayers liquidity (or lack thereof) when estate taxes come due and estates consist largely of farms or other sorts of family businesses.

Unified Credit

One possible reform to the jumbled present law would be to make the credit (once again) fully “unified,” with a common tax rate schedule and a single exemption amount covering gifts made during life, as well as transfers at death. Most folks believe this would simplify planning, not to mention that the current structure probably distorts behavior by encouraging taxpayers to hold on to property until they die.

Another potential reform would result in “portability,” allowing a surviving spouse to benefit from the unused exemption amount of the first to die. The IRS could have a problem with this, from an administrative standpoint. Prevalence these days of multiple marriages could also complicate how “portability” might work.

Liquidity

Current law allows real estate to be valued at its current use value (e.g., a farm) rather than at the higher fair market value of the same property in the hands of a developer. Another provision allows for payment of estate tax attributable to certain family businesses over five to 10 years. JCX-23-08 analyzes data which suggest that while many estates do possess enough liquidity to enable them to pay the full amount of tax right away, the decreased liquidity which results can often impair a business’ ability to function and grow.

These issues and others will be the focus of a free presentation by the Parasol Foundation from 4 to 6 p.m. Wednesday to which all are invited. Bring your questions and comments. A panel comprised of local professionals will look forward to your participation.

CONSULT YOUR TAX ADVISER - This article contains general information about various tax matters. You should consult your CPA regarding the implications to your own particular situation.

Jeff Quinn, the author of this article, is a shareholder in Ashley Quinn, CPAs and Consultants. He can be reached at (775) 831-7288, or jquinn@ashleyquinncpas.com.