Estate Tax Makes Even Death Uncertain

Reece Parham has spent much of 2010 struggling to find answers for clients with estate-tax needs.

“It’s kind of hard to plan when you don’t know what the law is going to be,” said Parham, a CPA at Sandlin & Parham in Fayetteville.

The uncertainty stems from a year-long break in the federal estate tax, as dictated by the Economic Growth and Tax Relief Reconciliation Act of 2001. Designed as a tax cut, EGTRRA resulted in a gradual hike in exclusion amount ($1 million to $3.5 million) and drop in the highest tax rate (55 percent to 45 percent) on affected estates. See chart here.

The act also set up, however, a return to the previous levels on Jan. 1, 2011. Complicating matters is the debate over whether Congress will let that happen.

So, with the new year fast approaching, Parham joked his advice has been reduced to this: “Please live another three months, and let’s see what happens.”

Ironically, though, some millionaires – and more directly, their heirs – would benefit financially by dying before the end of the year. The heirs of former New York Yankees owner George Steinbrenner, for example, could save an estimated $500 million to $600 million following his July death, thanks to the absence of the federal estate tax.

“You don’t know whether to commit suicide or just go on living and working,” manufacturing magnate Eugene Sukup told The Wall Street Journal, adding his estate taxes – which would be zero this year – might be more than $15 million if he dies next year.

Even on a $5 million estate, the tax cost of dying a minute after midnight on Jan. 1 – as opposed to a few minutes earlier – could be more than $2 million.

Perhaps the most dramatic case to date is that of Texas tycoon Dan Duncan, who died in March and left his heirs billions that would have gone to the U.S. Department of the Treasury in any other year. And while some have suggested the government might pursue such lost revenue via retroactive legislation, Fayetteville attorney Lee Moore isn’t sure that’s a viable path.

“Take Steinbrenner’s family,” said Moore, a founding partner specializing in estate planning at Reece Moore Pendergraft LLP. “You think they’re not going to challenge retroactivity over the dollars involved there?”

Governmental Gaffe

What really bothers Moore, though, is the idea of what will happen to those who barely qualify to pay the estate tax should it revert to its 2001 level on Jan. 1.

“(Duncan’s) children are going to get a $4 billion gift with no estate tax,” Moore said. “In January, Aunt Minnie’s gonna die with a million-and-a-half dollars and her kids are gonna owe $250,000.

“It’s a messed-up policy.”

Joe Reece, one of Moore’s fellow founding partners, agreed.

“It is truly a failure of the political establishment in this country to have ever let this come this far,” Reece said, “and it’s having a significant impact – even though we make our living helping people unpack all this – and it’s really just bad policy for the country.”

The failure to enact some level of estate tax for 2010 is surprising, too, given the fact it’s a revenue generator for the federal government. The Congressional Budget Office reported $25.7 billion in estate taxes were collected in 2008, and projects a combined total of $363.9 billion from 2010 to 2019.

That’s part of the reason Moore believes change is on the way.

“I do believe that we’ll get some estate tax certainty some time next year,” Moore said. “They’re scrambling over rates and dollar amounts.”

On this, Reece isn’t as convinced.

“I think in this election there is so much of a philosophical divide in the United States of America that you could see gridlock that would amaze you,” Reece said. “I would like to think that our leaders would have the best interest of the country at heart, but sometimes when I watch my evening news, I’m not so optimistic.”

Reece clarified by saying he can envision a scenario in which Congress allows the 2001 levels to be reinstituted without change.

Similar doubts are widespread. Lonnie Copps is senior vice president and trust officer for both Bank of Arkansas NA and Bank of Oklahoma, which are parts of Tulsa-based BOK Financial Corp.

“It was inconceivable to most professionals in this field that our elected leaders would allow the estate tax to revert back to the levels seen in 2001,” Copps wrote in an e-mail, “effectively increasing taxes not only on those perceived as the wealthy, but those in the middle class as well with estates worth $1 million or more.”

Sticky Situation

Copps said reversion also would hurt small business owners, while The Wall Street Journal estimated returning to 2001 levels could affect eight times as many people as using the 2009 levels. Having so many people potentially affected means lots of questions for the likes of George Kitchens, a CPA at Stafford & Westervelt in Bentonville.

“The question I hear the most is, ‘What’s going to happen?’ and the answer is, ‘I’m not sure anybody knows,'” Kitchens said with a laugh.

Such is the nature of the problem.

“We’re in a no man’s land,” Reece said. “Having said that, the other side is, ‘Should people just hunker down and quit planning?’

“No. Often times, out of chaos and confusion come opportunities. The chaos makes it hard, but there are opportunities that are present in today’s environment of estate planning that we will probably never again see in our lifetime, opportunities to save money.”

Kitchens pointed out an even more practical point.

“Even without the estate tax, there’s still planning to do,” he said.

The tricky part is weighing decisions made today against the possibilities of what might happen in the coming year.

“You can’t go backwards,” Parham said. “Once it’s done, it’s done.”

With that in mind, Reece said in-depth conversations with clients are a must.

“As an adviser, you have to read where your client is economically, what their risk level is, how frustrated they’re going to get, because tax litigation takes a while,” Reece said. “It doesn’t happen overnight.”

Even then, Moore added, certain strategies can be a tough sell.

“Wealthy families look and see and know that they can make tremendous amounts of money in transfer planning by using qualified personnel,” Moore said. “But it’s so complicated and they can’t get comfortable trusting us, that many times they get cold feet and say, ‘I can’t do that because I can’t understand it.’

“Yet they’ll go to a heart surgeon – they don’t understand that heart surgery – but they’ll trust that heart surgeon to get the job done.”

The bottom line seems to be estate planning is a volatile endeavor that doesn’t figure to get easier any time soon.

“There have been messes my whole career,” Parham said. “This is a pretty big one “