Tax, Trusts & Estates Law Monitor : Estate Planning Lawyer & Attorney : Cole Schotz Meisel Forman & Leonard Law Firm : NJ, Mid-Atlantic Gift Tax & Trust Issues

Repeal of the federal estate tax in 2010 – once unthinkable – now appears likely. While the House of Representatives passed a permanent extension of the estate tax in early December, the Senate has been unable to pass a temporary or permanent extension, or anything else related to the estate tax, as Congress rushes toward its holiday recess. It now appears likely that nothing will be passed prior to the end of the year and we will begin 2010 with no federal estate tax.

Congressional leaders have stated that they will resume efforts to pass legislation as soon as Congress returns, so repeal, if it happens, may be short-lived. Some Republicans have stated that they feel they will have better leverage to negotiate if the estate tax is actually repealed. Democrats have stated they would hope to restore the current tax and make it retroactive to January 1.

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On December 3, the House of Representatives by a vote of 225 to 200 passed an estate tax bill which makes the $3.5 million applicable exclusion amount and the 45% estate tax rate permanent. Every Republican, along with 26 Democrats, voted no on the bill. If a law is not passed by December 31, the estate tax will be repealed for one year, and in 2011, the estate tax will return with a $1 million exemption (subject to inflation) and a top estate tax rate of 55%. The Senate is not expected to adopt this bill; it is more likely to pass a one year extension of the current law. We will keep you posted on all developments as they unfold.

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Although Congress has been focused on health care and two wars, virtually everyone agrees that there will be estate tax legislation in the final 30 days of 2009, and the repeal scheduled for January 1, 2010, is not going to happen.

House Majority Leader Steny Hoyer is expected to bring a bill to the floor this week that would make permanent the 2009 estate tax levels ($3.5 million exemption, 45% rate), though a one-year patch also remains a possibility. This bill does not include other features like reunification, portability and indexing for inflation, due to concerns that these features increase the “cost” of the bill and make it less likely to pass given the limited time for consideration.

The Senate will take up the legislation toward the middle of December. Several lobbying groups feel that there is greater support in the Senate for reunification, portability and indexing.

If some or all of these features are included in the Senate bill, but not the House bill, they will get resolved in conference. Lobbying groups predict it will be down to the wire, with any agreement occurring between December 23 and December 30.
 

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President Obama signed the “Worker, Homeownership and Business Assistance Act of 2009” on November 6, 2009. Among other things, the new law expands the net operating loss carryback rules so that virtually all taxpayers can elect to carryback 2008 and 2009 NOLs for up to five years.

A net operating loss (“NOL”) generally means the amount by which a taxpayer’s business deductions exceed its gross income. In general, an NOL may be carried back two years and carried over 20 years to offset taxable income in those years.

Under present law (which was passed in 2009 as part of the federal stimulus measures), “electing small businesses” – generally businesses (including individuals who run a trade or business) with less than $15 million in annual sales – can elect to carry back a 2008 net operating loss for three, four or five years instead of the usual two years.

The new law expands this rule by permitting virtually all businesses (other than those that have received federal bailout money or been acquired by the federal government) to elect to carry back 2008 and 2009 NOLs for three, four or five years. Under the new law, however, there is a 50 percent income limit on any NOL offsets applied to the fifth year.

The law also affects the NOL deduction for AMT purposes. Under present law a taxpayer’s NOL deduction cannot reduce the taxpayer’s AMT income by more than 90%. This restriction is suspended under the new law for 2008 and 2009 NOLs and related carrybacks.

The decision as to whether to make the carryback election can be complicated and generally involves analyzing (1) the size of the NOL, (2) the taxpayer’s income, character of the income (ordinary or capital gain), and effective tax rate in each of the past five years, (3) the taxpayer’s expected future income and (4) the effect of any carryback for AMT purposes. A taxpayer can also elect under Code §172(b)(3) to waive the carryback to prior years and therefore carry the entire NOL forward to future years.
 

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Click here to read about issues that can arise when estate planning involves real estate.

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When a US citizen relinquishes citizenship or a long-term US resident (green card holder) leaves the US, new rules in effect since June, 2008 can apply to treat the expatriate as if he or she sold all of his or her assets (worldwide) as of the date of expatriation, triggering an immediate income tax on all appreciated assets. This rule is intended to prevent expatriates from moving their assets offshore without paying tax, and can have significant adverse tax consequences.

Last week, the IRS issued Notice 2009-85, which provides 58 pages of detailed guidance regarding the operation of these rules.

A qualifying expatriate, generally speaking, is a US citizen who relinquishes citizenship or a long term resident who terminates US residency, and who meets either (1) the average annual net income tax test (more than $124,000 average annual income tax in each of the last five years), (2) the net worth test (greater than $2 million) or (3) the “failure to certify” test (failure to certify compliance with the US tax laws).

The rule triggering immediate income tax on expatriation is mitigated by an exemption for the first $600,000 of gain (adjusted for inflation). A taxpayer also may be able to defer the payment of tax if a number of conditions are met. Lastly, the deemed sale rules do not apply to deferred compensation items, specified tax deferred accounts and interests in trusts where the expatriate is a beneficiary.

Please contact us if you would like to discuss how these complicated rules may apply to you.
 

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The IRS recently announced in Revenue Procedure 2009-50 that the gift tax annual exclusion amount available to taxpayers in 2010 will remain unchanged at $13,000. The Tax Reform Act of 1997 tied the then $10,000 gift tax annual exclusion to cost of living adjustments based on increases in the Consumer Price Index. As a result, since 1998, the annual exclusion has increased from $10,000 to $13,000. The annual exclusion permits a taxpayer to gift $13,000 annually to any beneficiary without being required to use his or her $1 million lifetime gift exemption amount.

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As of January 1, 2010, new rules take effect, permitting taxpayers to convert their traditional IRAs to Roth IRAs without any income limitations.  Click here for an overview of Roth IRAs and a summary of the new conversion rules.

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The imminent federal estate tax legislation is on everyone’s minds, and it appears increasingly likely that the legislation this year will be a one-year patch, or a one-year freeze of the 2009 rules (a 45% estate tax rate and a $3.5 million exemption).

According to the Association for Advanced Life Underwriting (“AALU”), an important trade and public affairs group, permanent reform is less likely this year and enactment of a one-year patch is the most likely outcome.

Some of the important considerations in the estate tax legislation debate include:

• Cost. According to congressional analysis, permanent enactment of the 45% estate tax rate and a $3.5 million exemption will “cost” the government $233 billion over 11 years (that is, compared to the 2001 rules which could return in 2011). Given large federal deficits, lawmakers may focus on the estate tax as one area to recover revenues lost through AMT reform, the R&D credit or other law changes.
• Reunification, portability and indexing. Some of the more thought-provoking issues in the estate tax debate include (1) reunification of the gift and estate tax exemptions, (2) the portability of unused exemption amounts between spouses, and (3) indexing the exemption amounts to inflation.
• Limitations on lack of control and lack of marketability discounts. Restrictions on the use of discounts are included in the “Pomeroy” bill, currently the leading bill in the House. It is of course unknown at this time whether this provision will be enacted.

The AALU predicts that the Senate debate on the estate tax will extend to mid or late December. We will continue to post updates as new issues arise regarding this legislation.
 

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