Planning for Income and Estate Taxes in an Uncertain Time

Now, in the midst of a flurry of tax proposals, not to mention the Republican gains in the midterm elections, legislators have only five weeks to act on the estate tax before the holiday recess. And taxes — both the estate tax and the income tax — are far from the only issues on Congress’s agenda. Few tax planners and lawyers are willing to speculate on what will happen in the last months of 2010. They learned their lesson last year. But Alfred Peguero, a personal finance partner at PricewaterhouseCoopers, said his firm believed the weeks of Dec. 6 and 13 offered the best window for a decision on the estate tax. If Congress does not act, the estate tax will revert to its 2001 level — a 55 percent tax rate for individual estates larger than $1 million. This will force seven times the number of estates to file estate tax returns next year as in 2009, when the individual exemption was $3.5 million and the rate was 45 percent, according to a report from the Tax Policy Center, a Washington research group. The group said 108,000 estates would have to file returns under the lower exemption and 44,000 would pay tax, compared with 15,000 estate tax returns in 2009 with 5,500 owing tax. There are few concrete solutions to planning for something as uncertain as the time of death and Congressional action on taxes. But several accountants, lawyers and financial advisers offered a few suggestions on things to do before year-end. All carry risks. ESTATE TAX A year with no estate tax has led to a lot of macabre jokes about ending the life of an elderly relative. And much was made of two billionaires — George Steinbrenner and Dan Duncan — who died this year and whose estates will presumably go untaxed. But the absence of an estate tax for just one year and the lack of guidance from the Internal Revenue Service on how to handle other death-related taxes that could be owed this year has created another problem. Assets do not get valued at the date of a person’s death, as they would with an estate tax. Instead, heirs have to calculate the assets’ appreciated value and pay capital gains tax on that amount. There are provisions in the tax code to give people a limited amount of relief from taxes on capital gains. But the process is onerous and so far the I.R.S. has released only a draft version of Form 8939, which will be needed to file those taxes in April. Leiha Macauley, a partner in the individual clients group at Day Pitney, a law firm in Boston, has an even more complicated problem. In May, a client died with an estate worth some $20 million, which he had left to his wife through a simple will. His widow, however, is 93. Lawyers have drawn up the paperwork that would allow her to disclaim her husband’s property. It would then pass estate tax-free to her children. But they are waiting to file the paperwork to make sure she lives to the end of the year.