Sunday, January 3, 2010

Die Now for Once in a Lifetime Estate Tax Savings? Congress Creates a Quagmire.

Summary -A Congressional showdown has produced an estate tax rate of zero, for the moment, with the future of the estate tax still up for grabs. The resulting uncertainty will hamper the efforts of charitable, educational and social organizations seeking major gifts and bequests from major donors.

Thanks to an unusual piece of Bush era tax legislation, the Federal Estate Tax rate, which has been decreasing for several years, is now zero for 2010. No matter how excited you are about this once in a lifetime (literally) estate tax planning opportunity, try not to die, at least until you have finished this post. If Congress does nothing, the estate tax will be back with a vengeance in 2011, when the Bush legislation expires and the higher taxes of the Clinton era come back to life (the dreaded Zombie Effect).

The House has already passed a bill extending the 2009 estate tax for 2010 (top rate 45% with first $3.5 million of each estate excluded from tax). The Senate is likely to consider adoption of the same approach, retroactive to January 1. Pro-estate tax forces in Congress have generally shown some willingness to compromise on rates and exclusions in order to get a tax in place for 2010. Opponents, who would like to repeal the "death tax" permanently, might be happy with the zero rate now, but even they want to get something done before 2011, when the Zombie Effect would produce a 55% top rate, with an exclusion of $1 million and new exposure of estate assets to capital gains tax. For now, some of the estate tax foes are playing hardball, confident that the Zombie Effect is not a serious threat, because it will be unpalatable to nearly everyone.

Why should you care about any of this if you are not wealthy, not planning to die within the next few years and not really into zombies? Estate tax planning drives a significant component of charitable giving. If your favorite school, environmental organization, or social justice institution hasn't already asked you to make a lifetime bequest of capital while reserving lifetime income under an annuity arrangement, it will someday. If you are rich enough and old enough to think about making this kind of gift, then you will want to understand the estate tax consequences. If the estate tax is up in the air, the estate tax consequences are unknowable. The result: worthy causes seeking major gifts and bequests will be hearing an awful lot of, "Let me get back to you once I know what's happening with estate taxes." Sustainable financing for even the most basic operations of some organizations could be jeopardized.

Today is not a good day to die, even for the estate planning fanatic. Today is a good day for Congress to produce serious estate tax legislation for 2010 and beyond. Don't let a showdown over the Zombie Effect bring charitable giving to its knees.

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