Let's Talk Taxes

One month from today the Senate will return to talk about a number of new subjects, including taxes. At least that's what some commentators are predicting, but only Harry Reid knows for sure. In the event that the Senate actually discusses taxes, and, in particular, the estate tax, here are three issues that deserve attention:

1. Predictability of the Estate Tax. As things stand know, we don't know which way the estate tax will go, and the possibilities range from no tax at all to a harsh $1 million exemption. Planning estates is difficult in this freeform climate and will likely lead to mistakes in the future. We need some tax laws that will remain the same for the indefinite future.

2. Retroactivity of the Estate Tax. If the tax is reinstated, it should be retroactive to Jan. 1 of this year. But the retroactivity should not be mandatory because it would be quickly overturned by the courts. Retroactivity is needed for trusts that include a funding clause for an A-B trust that will not adequately fund the trust during the repeal year. If there had been an estate tax this year, funding these exemption trusts would be simple - the maximum amount is the amount of the exemption. But when the exemption amount doesn't exist, thanks to repeal, the amount that can be funded to an A-B trust is zero. There may be funding formulas that provide otherwise, but many will not adequately fund the exemption trust in a typical trust. That can be corrected by making the estate tax retroactive, provided the trustee or executor has the authority to elect retroactivity.

3. Step-up in Basis at Death. For the past eight months, the step-up in basis for capital gains purposes has been limited to $1.3 million worth of assets for transfers at death to beneficiaries other than a spouse. This is a confusing issue that is causing many taxpayers problems as they try to research decedent's records to find out what the purchase price was, or how the value was changed by mergers, etc. Stepping up the basis for all of a decedent's appreciated assets has been the law for decades, and it is time to return to the full step-up rules. This also should be retroactive to Jan. 1.

Although I am hopeful that some action will be taken on the estate tax next month, I realize it is more likely that Congress will wait until after the November election to make decisions on these issues. But even that will be better than no action at all this year.