Jane Bryant Quinn—New Estate-Tax Law Could Result in Planning Quagmire

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Congress has cobbled together the strangest, most reckless, most well hilarious estate-tax law ever. Laughter is the only rational response.

People who are worth enough to owe estate taxes today are going to get to know their lawyers really well.

Even if you yourself don’t have money, your parents or grandparents might. This law will probably affect when and whether you receive big cash gifts.

Some heirs may owe a new capital gains tax, even when no other tax is levied on the estate.

Planning nightmares lie ahead. The new law phases in over 10 years, requiring different choices in different years. If you leave your current will as is, you might accidentally deprive your spouse of cash.

On the upside, estates that have been paying federal taxes (around 2 percent of them each year) will see that tax wither away that is, unless the law is changed.


Here’s what Congress wrought:

Next year, the tax-free amount you can leave to heirs rises to $1 million, from $675,000 today (double those amounts, for married couples with a “bypass” trust designed to save estate taxes). The top tax rate drops to 50 percent from 55 percent.

Over the following seven years, the amount you can leave tax-free rises gradually to $3.5 million in 2009 ($7 million for couples with a bypass trust). The top tax rate on larger estates slowly drops to 45 percent. In 2010, the federal estate tax ends.

Then comes the craziness of 2011. In that year, supposedly, the law reinstates all the taxes in force today.

That won’t happen, of course. This law will change, although we don’t know how. For planning, you’re in la-la land.

As if that’s not enough, Congress has thrown you another curve. In 2010, heirs may be taxed on the capital gains they inherit, even when no estate taxes are due.

Today, you’re not taxed on inherited capital gains. If your mother paid $10,000 for a stock and it’s worth $50,000 when she dies, the $40,000 gain passes to you tax free. Under the new law, however, you may owe a tax on that gain when the stock is sold.

Heirs will be able to inherit $1.3 million in capital gains tax-free, plus another $3 million for a surviving spouse, for $4.3 million in all. But capital gains taxes will be owed on larger amounts including gains in real estate, farmland and businesses.

With all these balls in the air, what should you do with potentially taxable money? Here are some thoughts:


– Rethink your will.

Under current law, married couples can cut their estate taxes by leaving money to children in a bypass trust. The income from the trust goes to the surviving spouse for life.

Typically, wills provide for these trusts to contain “the maximum allowed by law.” Under the new law, however, the maximum could be as much as $3.5 million. You might not want that much to go to the children’s trust. It might leave too little for your spouse.

In this case, you should change your will. Perhaps you need a dollar cap on the size of the trust. Perhaps you don’t need this trust at all.


– Cultivate your marital relationship.

Some wealthy spouses usually men don’t want to leave their wives with access to a lot of money. But current tax law lets them pass all their assets to a spouse tax-free. So they leave it to her in trust.

With no estate tax, they might leave their wives the bare minimum required by law (usually, one-third to one-half of the assets) and give the rest to their children. (They’re thinking, “That ungrateful wench isn’t going to remarry on my money!”)


– Weigh new gifts.

The “poor rich” (up to $3.5 million for singles; up to $7 million for couples) might continue making tax-motivated gifts for the first few years. But as estate taxes shrink, so may their interest in giving their money away.

The “rich rich” will keep making gifts, especially to get appreciating assets out of their estates. With proper planning, they won’t pay gift taxes anyway.

Big gifts to children are typically structured as an installment sale; the children might pay their parents something on the notes or the notes might be canceled at death.


– Gather good records.

You need to show what your assets were originally worth, just in case the gains are taxable to heirs. The part of the law taxing capital gains may be canceled before it takes effect, but you can’t count on that yet.

Syndicated columnist Jane Bryant Quinn can be reached in care of the Washington Post Writers Group, 1150 15th St., Washington D.C. 20071-9200.

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