Help is on the Way from the Will Doctor

We are busy working on planning solutions to go some way towards assisting our clients address this uncertainty in a helpful way.  In a few weeks we expect to have in place new language in our wills and revocable trusts which will enable any of our married clients who should die this year to continue to meet their family objectives in a tax effective manner. Stay tuned.  We are planning a mailing to all of our clients around the end of this month.  In them meantime, if you are a client or advisor of our clients and you need any additional information or help, please give us a call.

Estate and GST Taxes Repealed; and Lower Gift Tax Rates

Thanks to the people at Proskauer in New York City for the following analysis:

In 2009, the estate and generation-skipping transfer (“GST”) tax exemptions were $3.5 million per person, and the estate and GST tax rates were 45%. In 2001, Congress passed changes to the estate, GST and gift tax rules that take effect in 2010. Those changes call for the estate and GST taxes to be repealed for 2010 and for the gift tax rate to be equal to the highest income tax rate in 2010, which is 35%.

Assuming Congress does not change the law, on January 1, 2011, the estate, GST and gift tax laws that existed on January 1, 2001 would be reinstated; that is, the estate and gift tax exemptions would be reunified again at $1 million and the GST exemption would be $1 million, indexed for inflation. The estate and gift tax rates would range from 39% to 55% depending on the taxable gift or estate with taxable transfers in excess of $3 million taxed at the top rate. For taxable transfers between $10 million and $17,184,000, there would be a 5% additional tax imposed to bring the tax to 60% (the effect of the 5% surcharge is to phase out the decedent’s estate tax exemption). In 2011, the GST tax rate would be 55%, the highest estate tax rate.

Even though almost everyone thought that Congress would act before 2010 so that repeal of the estate and GST taxes would never actually take place, Congress did not have time to act – and 2010 began without an estate tax applicable to people who die during 2010. However, Congress has indicated that it will attempt to pass an estate tax bill that is retroactive, so that there is no repeal of the estate and GST taxes. Whether retroactive taxation is constitutional is far from certain and time will tell regarding its viability.

With this confusion regarding the estate, gift and GST tax rules, we thought it would be helpful if we provided a summary of the current status of the law and what might happen if Congress changes that law. That summary appears below:

Law Applicable Before 2010

The rules that applied before 2010 are:

1. Estates of more than $3.5 million were subject to estate tax at a 45% rate.

2. Gifts that exceeded the amount of the annual gift tax exclusion ($13,000 for 2009) were taxed at a 45% rate once those gifts exceeded the individual’s $ 1 million lifetime gift tax exemption.

3. To the extent a person’s lifetime gift tax exemption was used up, that person’s exemption from estate tax was reduced.

4. When someone died, that person’s heirs inherited their property with an income tax basis equal to fair market value at the time of that person’s death. (The result is that the heirs can generally sell the inherited property without income tax consequences.)

5. During life a person could gift up to $3.5 million to grandchildren (or other individuals two or more generations below their own) without incurring GST tax. To the extent not used during life, that $3.5 million GST tax exemption was available for use at death.

Generation-skipping transfers that exceed the GST exemption were subject to GST tax at a 45% rate.

The following example illustrates how the rules applicable before 2010 worked:

Example 1

Assume a father made gifts to his son in 2009 that totaled $1,013,001. $13,000 of that gift used his annual exclusion for his son. $1 million used up his lifetime exemption against gift tax. The last $1 was subject to gift tax at a 45% rate.

Now assume that the father died in 2009 with a $7 million estate which will be distributed to a trust for his son, and that the father’s property had a zero basis. Because the father had already used $1 million (forget about the $1 for purposes of this example!) of his $3.5 million estate tax exemption, he had $2.5 million remaining to be used at his death. Therefore, of the father’s $7 million estate, $2.5 million escaped estate tax – and a tax of 45% was imposed on the balance; the estate tax due was $2,025,000.

Son’s trust received the $7 million property with a $7 million basis. If the trust sold that property for $7 million, there is no gain and no income tax due.

Father made no gifts to grandchildren during his lifetime, so he had $3.5 million of GST exemption to allocate to the trust for his son. That allocation will help avoid tax when the son dies and the assets in the son’s trust pass to son’s children (father’s grandchildren).

Law Applicable During 2010

The rules that apply during 2010 are:

1. There is no estate tax.

2. The gift tax rate drops to 35%. The gift tax exemptions remain unchanged. Therefore, gifts that exceed the amount of the annual gift tax exclusion ($13,000) are taxed at a 35% rate once those gifts exceed the individual’s $ 1 million lifetime gift tax exemption.

3. When someone dies, the basis step-up at death is eliminated – except for the first $1.3 million that passes to someone other than a decedent’s spouse and the first $3 million that passes to a decedent’s spouse.

4. There is no GST tax.

The following example illustrates how the rules applicable during 2010 work:

Example 2

Assume a father makes gifts to his son in 2010 that total $1,013,001. $13,000 of that gift uses his gift tax annual exclusion for his son. $1 million uses up his lifetime exemption against gift tax. The last $1 is subject to gift tax at a 35% rate.

Now assume that the father dies in 2010 with a $7 million estate which will be distributed to a trust for his son, and that the father’s property had a zero basis. No estate tax is imposed.

Because father is not married, only $1.3 million of the basis can be stepped up for the $7 million property. Therefore, son’s trust receives the $7 million property with a $1.3 million basis. If the trust sells that property for $7 million, there is $5,700,000 of capital gain, which will be taxed at the capital gains rate. Assuming that the rate is 25%, the income tax due is $1,425,000.

Note: because there is no GST tax during 2010, father could leave whatever he wanted to his grandchildren without imposition of GST tax. Depending on the law at the time when the son dies will dictate whether GST tax will be imposed at that time.

Law Applicable After 2010

The rules that apply after 2010 are:

1. The estate tax exemption is $1 million. Taxable estates in excess of $1 million are subject to estate tax at rates ranging from 39% to 55%, depending on the amount. The top rate of 55% is imposed on taxable estates in excess of $3 million. There is an additional 5% surcharge for estates that exceed $10 million and are less than $17,184,000.

2. The gift tax exemption is also $1 million. Similar to taxable estates, taxable gifts in excess of $1 million are subject to gift tax at rates ranging from 39% to 55%, depending on the amount. The top rate of 55% is imposed on taxable gifts in excess of $3 million.

3. To the extent a person’s lifetime gift tax exemption is used up, that person’s exemption from estate tax is reduced.

4. When someone dies, that person’s heirs inherit their property with an income tax basis equal to fair market value at the time that person’s death. (The result is that the heirs can generally sell the inherited property without income tax consequences.)

5. During life a person can gift up to $1 million (as indexed for inflation) to grandchildren (or other individuals two or more generations below their own) without incurring GST tax. To the extent not used during life, that $1 million GST tax exemption is available for use at death.

6. Generation-skipping transfers that exceed the GST exemption are subject to GST tax at a 55% rate.

The following example illustrates how the rules applicable after 2010 work:

Example 3

Assume a father makes gifts to his son in 2011 that total $1,013,001. $13,000 of that gift uses his annual exclusion for his son. $1 million uses up his lifetime gift tax exemption. The last $1 is subject to gift tax at a 39% rate (with graduated rates for future gifts that are taxed at rates between 39% and 55%).

Now assume that the father dies in 2011 with a $7 million estate which will be distributed to a trust for his son, and that the father’s property had a zero basis. Because the father has already used his $1 million gift tax exemption (forget about the $1 for purposes of this example!), he has $2.5 million remaining to be used at his death. Therefore, the father’s entire $7 million estate is subject to estate tax. Based on graduated tax rates, $3,792,500 of estate tax is due.

Son’s trust receives the $7 million property with a $7 million basis. If the trust sells that property for $7 million, there is no gain and no income tax due.

Father made no gifts to grandchildren during his lifetime, so he has $1 million of GST exemption to allocate to the trust for his son. That allocation will help avoid tax when the son dies and the assets in the son’s trust pass to son’s children (father’s grandchildren).

WILL CONGRESS ACT RETROACTIVELY?

There is talk in Congress about passing a retroactive estate tax bill in 2010, which would eliminate the repeal so that estates of persons dying in 2010 would be subject to estate tax. Presumably, the GST tax would also be reinstated retroactively and the higher gift tax rate of 45% would also be reinstated retroactively.

The provisions of such a retroactive law – if it comes to pass – are not now determinable. The House has passed a bill keeping the rules as they are in 2009. The Senate has not passed a bill – though some Senators have been pushing for a $5 million exemption from estate tax and a 35% maximum rate. One compromise suggested was to keep the 2009 rules in force but to allow the $3.5 million exemption to grow with inflation.

One can only speculate as to what – if anything – Congress might do this year. The ability of Congress to act retroactively is also an issue; there are some cases that suggest retroactive action would be constitutional, but one can certainly expect a constitutionality challenge from the estate of a wealthy individual who dies after 2009 but prior to any 2010 retroactive legislation or an individual who makes a gift to his grandchildren in early 2010 prior to any retroactive legislation expecting to pay gift tax at a 35% rate and no GST tax!

Bill To Make 2009 Rules Permanent Passes the House

The House of Representatives passed on December 3, 2009, H.R. 4154, introduced by Rep. Pomeroy (D-N.D.). This bill, entitled the “Permanent Estate Tax Relief for Families, Farmers and Small Businesses Act of 2009,” would (a) make the estate, gift, and GST taxes permanent; (b) make permanent the 45-percent top estate, gift, and GST tax rate bracket; (c) make permanent the $3.5 million applicable exclusion amount; and (d) repeal the carryover basis rules and preserve the date-of-death value basis rules. (H.R. 4154, 111th Cong., 1st Sess. (2009))

The bill passed the House of Representatives by a vote of 224-199, and it is likely to be modified in the Senate, where several key Senators are known to favor indexing the applicable exclusion amount and possibly other changes in the current tax rules.

The Will Doctor assumes that any adjustments in the Senate will be helpful, perhaps to phase in a lower rate or a larger ($5mm) exemption equivalent. The chances of a quick resolution of this are uncertain-but: we agree with Mr. Blattmachr and others that if the Congress adjourns in the fall before the election without having passed this remedial and permanent legislation, then the chances of the next Congress doing so (for “political” reasons) are low.  Accordingly, we are now assessing strategies designed to take advantage of the window of transfer tax opportunity which would open for a few months before the door closes and we enter the era of a $1 million exemption again in 2011. We will keep you informed.

Hulse in NY Times on Dec 18th

The Will Doctor considers this a useful article to limit confusion in a confusing situation, when coupled with other posts.

Estate Tax Is Expiring, but Death Won’t Last – NYTimes.com

WASHINGTON — A Congressional tax standoff has opened a window of opportunity for wealthy Americans determined to avoid paying up post-mortem.

With lawmakers unable to agree on a year-end fix for a quirk in the Bush-era tax cuts, the federal estate tax is set to be repealed for one year as of Jan. 1, meaning that those who suffer a timely death could escape the usual certainty of taxes.

“If you are at the checkout counter, you might want to expedite things,” said Representative Richard E. Neal, the Massachusetts Democrat who heads the House subcommittee on taxation.

While the tax is about to expire, it probably should not be buried just yet.

Democrats are vowing to resurrect it as soon as Congress returns in 2010. Even its most ardent foes acknowledge that some accommodation will have to be reached because the tax is now scheduled to rise from the grave, zombielike, with even more reach in 2011.

“We understand we are not going to be able to keep total repeal in place permanently,” said Dick Patten, president of the American Family Business Institute, an advocacy group that opposes the estate tax. “By the time we reach the end of next year, we know we have to come with a compromise solution that is advantageous to the survival of family businesses.”

For now, he and the backers of his group are celebrating as the countdown clock at NoDeathTax.org ticks down to zero. But not everyone is happy. The extremely jumbled tax situation has members of Congress at odds, estate planners facing questions from their clients and, perhaps, the heads of some wealthy families wondering if relatives gathered for the holidays truly wish them a happy and healthy new year.

“It has the potential for chaos,” said Chuck Marr, director of federal tax policy at the Center on Budget and Policy Priorities.

The situation dates to 2001 when Republicans, with President George W. Bush newly ensconced in the White House, sought to realize their goal of eliminating a tax on assets being passed on to heirs. The tax became an iconic issue among Republicans who labeled it the death tax and rallied around its repeal in the mid-1990s during their push to win control of Congress.

Backers of the tax cuts wanted it eliminated altogether. But because that would have proved too costly, Congress instead devised a convoluted scheme that gradually raised the value of estates exempt from the tax and reduced the tax rate to the point — for the next two weeks — that an individual estate valued at $3.5 million or more is taxed at the rate of 45 percent. (This year, the tax will bring in an estimated $25 billion).

At the beginning of the new year, that tax is eliminated entirely, only to be restored in 2011 at a rate of 55 percent on estates of $1 million or more — essentially the law in effect before the 2001 change.

At the time, Republicans assumed they would simply fix the flaws well before 2009 ever arrived, presumably through a full repeal of the estate tax. But the political pendulum swung, bringing to power Democrats who were highly resistant to rescinding the tax, a move that many of them believed would be too generous to the nation’s most affluent.

As this year drew to a close, Democrats scrambled unsuccessfully to find an alternative to the wild swings in taxation. But they failed to persuade Republicans to agree to extend the current law, at least until a better approach could be devised.

There is yet another wrinkle. When they scheduled the demise of the estate tax for 2009, the authors of the 2001 tax measure replaced it with a capital gains tax of 15 percent on inherited property that is later sold.

The threshold for being subject to those taxes is set lower, with the first $1.3 million in capital gains exempted for general heirs and $3 million for spouses. Democrats argue that thousands of estates that would not have been subject to taxes under the current law could get hit in 2010 even as those at the higher end of inheritance scale escape the 45 percent tax bite.

“If you are rich, celebrate,” said Senator Harry Reid, Democrat of Nevada and the majority leader. “If you are not, you should be afraid.”

Republicans note that the capital gains tax will be levied only if heirs sell the assets, providing incentive for families to hold on to their farms and businesses.

“As between paying 45 percent and 15 percent, I think it is pretty clear what most small business folks and farmers would like to do,” said Senator Jon Kyl, Republican of Arizona and a longtime foe of the estate tax.

Democrats hope to make the situation moot by restoring the current tax and making it retroactive to Jan. 1. Republicans would like to negotiate a new tax structure, perhaps taxing eligible estates at the 15 percent capital gains rate.

Either way, one thing does seem certain: the struggle over the death tax is not likely to pass on anytime soon.

The Will Doctor on Tax Planning in 2010

Another proposal just before year end in the House contained a phased in increase in the exemption equivalent to $5 million, and phased in decrease in the tax rate, down to 35%.  At this point, it starts becoming more difficult to determine whether Congress will be able to overcome its polarization in order to provide some order and stability in the tax regime concerning transfers of wealth.

It still seems reasonable to assume the weight of probability lies in favor of the permanent extension of the 2009 regime, or some compromise like the one above-enacted early this year.  But the likelihood of inaction and the resulting tax boondoggle in 2011 is now a real threat.  Scroggins, in his excellent synopsis of the issues which I posted today, gives it a 40 percent chance-and I have noted other commentators who consider it more in the fifty percent area.

All serious and “best of breed” estate planners are now enmeshed (as presenters or attendees)  in seminars now being offered by state and national bar associations and other providers, designed to help us deal with this uncertainty.  I will be participating in several over the next few weeks.  We anticipate calls from anxious clients (including those who wonder if they should embrace death this year to save taxes) who are rightfully concerned about the disposition of their wealth in this environment.

Fortunately, for a number of years we have been using forms for our wills and trusts which anticipated the possibility of the new tax (or non tax) regime, but these are likely to be bolstered by new language and techniques just now being developed.  We will make these available to our clients as soon as possible, and we are preparing a mailing for later this month to keep our clients as informed as possible.  In the meantime, we will keep you informed of progress on this blog.

Clients will be asking whether it makes sense to risk large gifts or other techniques in this environment, and we will generally respond with a conservative view-although each case MUST be considered based on its own circumstances.   A conservative view would recognize the possibility and likelihood of a retro-active application of the 2009 (or similar) tax regime-and it appears very unlikely that the law would exempt transfers made (in good faith??) in the interim.

So, the current strategy is: wait, and listen.  For clients presently engaged in their planning, we believe that it would be imprudent and wrong to avoid the implementation of a multi-generational disposition of creditor protected and family focused wealth transmission due to tax uncertainty.  We continue to design our documents to be as flexible as possible, to anticipate and cope with uncertainty in a way that will reduce the need for future changes.

For clients with estate plans implemented in the last few years, no immediate change is necessary-and we will contact you if we determine that action is necessary or advisable.  For clients with older documents, it is always appropriate for a review of your situation to reduce the risk of bad tax (and non tax) results.

A Thorough Analysis as of Year End, by Scroggins, for the Technically Minded

October, 2009 Technical Newsletter
Provided by Leimberg Information Services
Author: Jeff Scroggins

LISI Estate Planning Newsletter #1505 took a close look at the seemingly never ending saga of the federal estate tax. Now, Jeff Scroggin weighs-in with his thoughts on this exceedingly complex issue.

EXECUTIVE SUMMARY:

The common consensus since 2001 has been that Congress would eventually adopt permanent transfer tax reforms that provide for estate tax exemptions in the range of $2.0-5.0 million and a flat estate tax between 25% to 45%. Most recent commentators have espoused the view that by 2011 the estate exemption will be $3.5 million and the estate tax rate will be a flat 45%.

This article will discuss other possibilities, including the potential return to the 2001 transfer tax rules on January 1, 2011 – less than 16 months from now.

While not yet probable, there is an increasing possibility of no transfer tax reform passing Congress before 2011 – with the result that the transfer tax provisions of the 2001 tax act automatically expire on January 1, 2011. That possibility will grow in probability if 2010 drags on without transfer tax legislation being passed.

If permanent or temporary transfer tax rules are adopted in 2010, it is unlikely, in the face of huge and growing deficits, that Congress will approve a $3.5 million estate exemption ($7.0 million for a married couple). A permanent estate exemption of $2.0 million for years 2011 and beyond may be the most we can reasonably hope for in legislation adopted in 2010.

FACTS:

When the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”) was enacted, most estate planners (and probably most Republicans and quite a few Democrats) expected that Congress would enact some form of permanent transfer tax legislation before 2010 to replace the temporary transfer tax provisions of EGTRRA. In the last 8 years, there have been numerous proposals advanced by both Democrats and Republicans, but none has come reasonably close to passing Congress. Both Congress in its 2010 budget and President Obama in his run for President have supported a $3.5 million exemption and a flat 45% estate tax bracket.

Unless legislative changes are enacted by the end of 2010, the 2001 EGTRRA changes to the transfer tax laws will expire on January 1, 2011.

COMMENT:

You have to start this analysis with an old quote from Louse XIV’s Controller-General of Finance: “The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least possible amount of hissing.”

Reform in 2009?

What is the chance of permanent transfer tax reform passing in 2009? Given the numerous legislative issues already before Congress in the next four months, it is extremely unlikely that it will address (or want to handle the conflict over) permanent transfer tax reform and the related issues, such as exemption portability. There are enough contentious issues before Congress (e.g., the economy, health care, the deficit, global warming, and the two wars) without having to debate the numerous proposals on transfer tax reform and their impact on federal revenue.

As noted in LISI Estate Planning Newsletter #1505 and articles in the Wall Street Journal (August 12, 2009) and National Underwriter (August 14, 2009), it appears that Congress will not address permanent transfer tax reform in 2009. Instead, it increasingly appears that Congress will carryover the 2009 rules to 2010, with the expectation that Congress will permanently address the issue in 2010.

Reform in 2010?

Thus, it seems logical that permanent transfer tax legislation, if any, will come in 2010. What are the chances of permanent transfer tax reform passing in 2010 at any significant exemption levels?

The Need. Let’s start with an obvious truth: There is a dire need for new sources of federal revenue. The pressure to raise revenue is going to be intense in 2010 and the years thereafter:

* The Congressional Budget Office and the White House agree that the ten year deficit will be over $9.0 trillion – greater than the total of all federal deficits since the country was created. The Committee for Responsible Federal Budget (www.newamerica.net) released a statement after the August announcement of a $2.0 trillion increase in the deficit: “An updated CBO analysis of the President’s budget would presumably provide even larger deficit projections than those released by the OMB.” As we come out of recession, Congress will hear a growing chorus of demands to reduce the deficit. That means either spending cuts (which Congress has not shown much interest in) or raising taxes.
* Most economists are predicting that the slow recovery from this recession will last at least through 2010. As a consequence, federal income taxes will not be recovering anytime soon and federal costs (e.g., unemployment, Medicaid, etc) will remain high.
* The President has repeatedly indicated that it is his intent to cut the deficit in half in 2013. That promise cannot be met without significant broad based tax increases.
* Projections on the 10 year cost of any final health care bill range from $600 billion to over $1.0 trillion. Second only to the issue of a public option of health care insurance, the issue of how to pay for universal health care may be the most contentious aspect of health care reform. In the near term, Congress is going to be looking for new sources of revenue. Could the estate tax be a ready revenue source? Or could increases in other revenue sources for health care dry up the well so much that the estate tax is one of the few untouched revenue sources still available?
* The federal cost of reducing global warming remains largely unknown – at least until the terms of any final bill are understood. Current proposals do not appear to be self-funding.
* In August the President proposed extending the expanded Child Care Credit and Earned Income Credit (both which provide for refunds to Americans who pay no taxes) through 2019. The estimated cost of the proposal is $85 billion over the next decade.
* The 2009 Annual Report from the Social Security Trustees (copy available at http://www.naepc.org/journal/) noted that the OASDI annual cost will exceed tax revenues in 2016. Although the trustees report $2.4 trillion in assets at the end of the 2008 fiscal year, most of the funds are held in US Treasury Securities, meaning that when the IOUs start coming due in 2016, the federal Treasury will have to start paying back the money. But even if the invested funds are fully repaid, the report notes that disability coverage will be “exhausted” in 2020 and the entire system will be “exhausted” by 2037. Reduced benefits and/or additional taxes will have to be obtained to cover these shortfalls.
* Some experts report that the unfunded obligation for federal entitlement programs is more significant than most Americans realize. David Walker, former head of the GAO stated in a Wall Street Journal article on September 6, 2009: “Our off balance sheet obligations associated with Social Security and Medicare put us in a $56 trillion financial hole—and that’s before the recession was officially declared last year.
* The Alternative Minimum Tax remains a thorn in the side of many Americans. In an April 15, 2004 report, the CBO reported that 90% of American taxpayers with AGI between $100,000 and $500,000 would pay AMT in 2010. Temporary reforms have mitigated some of this impact, but the Tax Policy Center (report of February 1, 2007 available at http://www.taxpolicycenter.org/) has estimated that the cost of long term reform is $800 billion to $1.5 trillion. The Administration estimates that the 10 year cost of taking just middle and upper middle income taxpayers out of AMT would be $448 billion.
* State budgets are in dire straits and there will be growing pressure on Congress to provide federal money to help support critical (and maybe not so critical) state programs. The Tax Policy Center (report dated September 3, 2009 available at http://www.taxpolicycenter.org/) reports that in 2010, 48 states face budget deficits (only Montana and North Dakota were exceptions) and 36 states already anticipate deficits in 2011. The combined state deficits for 2010 and 2011 were projected to be at least $350 billion.

Taxes Will Go Up. There are a number of income tax increases that will automatically occur in 2011 (unless Congress eliminates these tax increases – an unlikely event): the increase in the top ordinary income tax rate to 39.6%, the increase of capital gains to 20% and the elimination of the 15% dividend rate.

Even with these automatic tax increases, to reduce the deficit and pay for new programs, Congress will have to find other significant revenue sources – and no single tax source will cover the entire shortfall. There will be increases in income taxes at levels below $250,000 AGI. Social security taxes and capital gain taxes are probably going up. And estate taxes are going to increase.

The media has already noted that President Obama’s promise to only raise income taxes on those earning over $250,000 in AGI (for married couples) is not going to make an appreciable dent in the projected $9.0 trillion deficit. An editorial in the New York Times on September 4, 2009, noted: “Nor is there enough to be gained by confining tax increases only to families making more than $250,000 a year ….. The question then is not whether taxes must go up, but when, how and how much.”

The Washington Post had a similar editorial on April 10, 2009 that said: “President Obama has promised that taxes will not be increased for families making under $250,000. That is a promise that will probably have to be dropped down the road.” David Wessel in a column on September 3, 2009 in the Wall Street Journal estimated that the effective tax bracket on the “rich” would have to increase to 68.9% from the current 31.1% rate to pay the $9.0 trillion deficit.

Bottom line? Those earning $250,000 and above cannot solve this shortfall on their own. The revenue to reduce the looming deficit is going to have to include other sources of taxation.

Estate Tax Revenues. With so much of the focus on taxing the wealthy – how much could be raised from higher estate taxes?

* A report by the Tax Policy Center (October 20, 2008 found at http://www.taxpolicycenter.org/) estimated that from 2008-2018, the current transfer tax laws (i.e., a return to 2001 in 2011) would generate $490 billion. Making permanent the 2009 tax rules would reduce this revenue to $292 billion. Because this report included three years of larger exemptions (i.e., 2008-2010), it understates the total estate taxes which would be paid in the decade following 2010. Moreover, as baby boomers and their parents pass, the long term revenue from their massive wealth transfer could be even more significant.
* If you Google the topic, you’ll find projections of wider and generally higher ranges of estate tax revenue for the ten year period from 2011 through 2020.

There may be a less obvious part of this debate. Historically, estate taxes have been only 1-2% of the total federal revenue. But a study by Boston College researchers Paul Schervish and John Havens estimated that from 2000 to 2050, between $41 and 136 trillion will have passed. Even with a 20% recessionary reduction in household net worth, there is a significant amount of wealth getting ready to pass from one generation to the next. Could this massive wealth transfer help fund many of the revenue problems the country faces and will Congress consider this source to be a politically more acceptable way to reduce the huge federal deficit?

One of the pivotal concerns of any increased taxation in this recovering economy is the impact of increased taxes on the economic recovery. I have tried to find analytical comparisons of the macro-economic impact of higher taxes on income versus higher taxes on estates, but have not been successful. While it would seem that a dollar of income tax has a broader negative impact on the economy than a dollar of estate tax, without analytical support, I cannot make that argument. Hopefully, that study will surface in the future.

In any case, as revenue pressures build on Congress and the President, the estate tax is a relatively easy tax to impose, compared to breaking a promise of not taxing people above $250,000 AGI. Imposition of an estate tax at lower estate values will partially mitigate the need to raise taxes on those below $250,000. Besides, dead people tend to complain less than the live ones.

How Does Washington Respond? Clearly increases in income taxes on those below $250,000 AGI will be necessary. But the Obama Administration and the Congress will be loathe to break his promise to raise taxes on those below $250,000 right before a Congressional off-year election– remember the election impact of President Bush’s statement that we read his lips on “No New Taxes?” Because of the 2010 Congressional election and minimizing the impact on an economic recovery, increased taxation of most taxpayers will probably have to wait until 2011.

As a result of immediate revenue needs, Congress and the President are and will be anxiously looking for new revenue sources that produce the least amount of taxpayer anger. A 2009 poll conducted for the Tax Foundation provides interesting insights into how Americans view their tax system and where Congress might go to find more revenue (see the 2009 Tax Attitudes Study at www.TaxFoundation.org).

The above 2009 poll noted that over 2/3rds of participants believe the estate tax should be eliminated. Despite the public’s strong animosity to the estate tax, only a small number of Americans are actually subject to the tax (estimated to be less than 1% of all estates in 2009). Politically, the estate tax is an easier source of revenue than the imposition of a broader based income tax. If the choice is between taxing me or some other guy, I will always choose the other guy, even if I don’t like the tax he has to pay.

It is important to remember that Congress does not have to do anything to have the 2001 transfer tax rules return in 2011. Despite what some pundits say, failing to adopt changes or allowing partisan conflict to purposely or unintentionally kill adoption of permanent reform is not going to be perceived in the same manner as adopting a tax increase. In today’s partisan Congressional environment, failure to act can always be blamed on the uncompromising partisanship of the other side. In 2010, Senate Republicans (and some Senate Democrats) may push for a $3.5 million estate exemption, but the House Congressional leadership will push for a much lower exemption, with the increasing possibility that uncompromising gridlock occurs and no estate tax legislation passes.

While the Senate appears to be willing to agree to a higher estate exemption, the fight will probably come from the House, where there is stronger resistance to the idea of allowing up to $7.0 million (for a married couple) to easily escape the grasp of the tax collector.

The 2010 wild card: if Democrats become concerned about losing the House and/or Senate as November 2010 approaches and if the death tax opponents start gaining traction, Congress could adopt some sort of permanent or temporary (e.g., carry the 2009 rules through 2012) legislation in the late summer/early fall of next year. However, there will be enough other issues demanding voter attention that permanent transfer tax reform may easily get lost in the noise and the Democrats may be more concerned about not ticking off their political base by giving those “rich people” another break.

Conclusions:

Bottom Line? It is all about what source of revenue raises “the least possible amount of hissing.” In case you missed it, see the quote at the beginning of this section of the newsletter.

What are the chances of either a permanent or temporary extension of the 2009 $3.5 million estate tax exemption? With a post-recession Congress highly concerned (some might say desperate) about finding new revenue to reduce the deficit and fund new programs, how likely are they to adopt legislation that takes money off the table – either temporarily or permanently? If the Democrats intend to impose heavier income taxes on wealthier Americans, why would they seriously consider letting the children of wealthier Americans receive what many will consider a tax windfall by providing high estate tax exemptions? A permanent or temporary $3.5 exemption ($7.0 million for a married couple) would seem politically and economically unacceptable. But, I have to admit that political and economic realities have not always driven Congressional decisions.

While not yet probable, it is possible that the EGTRRA transfer tax rules will expire in 2011. This is an increasing possibility – which will grow in probability if 2010 drags on without transfer tax legislation being passed.

Equally or more possible is Congress adopting a permanent estate tax exemption which is somewhat larger than the $1.0 million exemption, while also adopting other changes designed to attack the benefit of current planning techniques, such as FLP valuation discounts.

A permanent estate exemption of $2.0 million may be the most we can reasonably hope for in 2010.

Scoring the Possibilities.

In the spirit of the fall football season and with a sports commentator’s dread (and probably with the same limited success) of trying to call it right, here are the author’s best bets on transfer tax legislation:

Legislation in 2009:

· Permanent Transfer Tax Legislation: 0%

· Congress Temporarily Carries Forward the 2009 Tax Law for 2-5 years: 20%

· One Year Carryover of the 2009 Tax Law to 2010: 80%

Legislation in 2010:

· Nothing Passes, with an Automatic Return to 2001 in 2011: 40%

· Permanent $2.0 million Estate Tax Exemption: 40%

· Permanent $3.5 million Estate Tax Exemption: 10%

· Permanent $5.0 million Estate Tax Exemption: 0%

· Congress punts by extending the 2009 Rules a Few More Years: 10%

· Elimination of the Step-Up in Basis: 0%

· Elimination of Estate Taxes: 0%

The author sensibly declines any prognostication on the gift and GST exemption levels, reunification of estate and gift exemptions, the applicable transfer tax rates, portability of exemptions, restoration of the state death tax credit, inflation adjustments to exemptions, or any other changes. Any of these could get into or be traded away in any final legislation. The other big uncertainty: the impact of a 2010 Congressional election on the adoption of new tax rules in 2011.

Impact of a Return to 2001.

What happens if we return to the 2001transfer tax rules in 2011? There are a number of results, including:

Higher Taxes. Without the adoption of permanent legislation by the end of 2010, the payment of federal estate taxes will skyrocket on January 1, 2011. There are three different aspects of this increased taxation:

First, the estate tax exemption will drop from $3.5 million to $1.0 million.

Second, the flat 45% estate tax bracket will increase to 55% on estates over $3.0 million and 60% on estates over $10 million. Estates valued at over $10 million would pay an additional 5% surtax designed to eliminate the benefit of the marginal tax rates below 55%. The 5% surtax stops once the estate’s value exceeded $17,184,000.

Last, the estate exemption and tax rates are not inflation adjusted – meaning that every dollar of growth in an estate will be subject to the highest applicable tax rate, even if the growth is solely the product of inflation. If many economists are correct and the deficit increases the inflation rate in the US, then this “bracket creep” could significantly increase estate taxes, even when the estate’s inflation-adjusted value has remained stable.

Note the estate tax differences on the following estates, growing at an annual rate of 5%:
2009 Estate 2009 Estate Tax 2011 Estate 2011 Estate Tax
Alternative #1 $2,000,000 -0- $2,205,000 $535,450
Alternative #2 $3,500,000 -0- $3,858,750 $1,417,313
Alternative #3 $10,000,000 $2,925,000 $11,025,000 $5,410,000

Without being alarmist, it is important that clients understand the possibility of these significant increases in their estate taxes and that they be encouraged to plan for the reduction of these potential taxes now – not when any final legislation is adopted (or not adopted) in 2010. A “wait-and-see” attitude in not in the best interest of the client or his/her advisors.

As an aside, there has been some confusion about what the estate exemption will be in 2011. In 2001 the estate exemption was $675,000, but was being phased up to $1.0 million. At an annual growth rate of just over 3.64% (not much above inflation), the 2001 exemption of $675,000 will roughly equal the value of the $1.0 million exemption in 2011. Effectively, we are close to the same inflation-adjusted estate exemption as we had in 2001.

Liquidity. If these higher taxes occur in 2011, they will create significant liquidity problems for many clients. Planners need to start raising the liquidity issues with clients today. If a client wants to purchase insurance to cover the potential increased taxes, they need to start planning today (e.g., the client becomes uninsurable before 2011).

Clients who decide to buy additional life insurance should consider placing the insurance in an irrevocable life insurance trust (“ILIT”). Because of the current legislative uncertainty, it may be appropriate to adopt contingency formulas in the ILIT to provide for how the passage of assets will occur in various scenarios. For example, if insurance is held in an ILIT, but is not needed to provide estate tax liquidity, a formula provision in the ILIT or the client’s will could pass more assets to the donor’s favorite charity. Flexibility should also include the use of limited powers of appointment in ILITs.

Many clients have estates in the range of $1.0 million to $3.0 million, including life insurance. Many planners have advised clients that with a federal estate tax exemption of $3.5 million each ($7.0 million collectively for a couple), they did not need to place life insurance in an ILIT, because the individual estate tax exemption and/or the joint exemption of the married couple produces a non-taxable estate. However, a return to a $1.0 million estate tax exemption could mean that many clients will have a taxable estate, with the result that 41%-55% of the insurance proceeds could be lost to federal estate taxes. Because of the three year contemplation of death rule on gratuitous transfers of life insurance, clients should consider making those transfers even before we know what legislation is adopted in 2010.

Retirement Planning. With the higher exemptions and new rules permitting heirs to make withdrawals from inherited IRAs over their lifetimes, many estate plans have provided that the retirement plan will pass to younger family members (to take advantage of the longer life expectancy) while passing other assets to a surviving spouse. These plans could create a number of problems upon a return to the 2001 rules.

For example, assume a client in a second marriage had a $1.5 million IRA and $2.0 million in other assets. Under his current planning, the IRA passes to a child from a prior marriage, while the $2.0 million is held in a QTIP trust for the second wife. At the current exemptions, no estate tax would be due at the client’s death, assuming his spouse survives him. On the other hand, if the client dies after 2010, there could be a federal estate tax of approximately $210,000 on the transfer of the IRA to the child. If the child reaches into the IRA to pay the $210,000 in estate taxes, the child will create federal taxable income $210,000 and a federal income tax of up $83,160 (at a 39.6% federal rate). If the child then reaches back into the IRA to pay the income taxes, there is an additional income tax. Each tax-generated withdrawal from the IRA will incur a new income tax.

The reduction in 2011 of the available estate tax exemption and the increase in estate tax rates means that clients with significant retirement accounts will have to reconsider the impact of the imposition of both income taxes and estate taxes on these IRD (i.e., income in respect of a decedent) assets. In many cases, rather then lose over 50% of the retirement plan assets to estate and income taxes, the clients will choose to pass all or a portion of their retirement assets to charity.

This area is characterized by an interesting conflict. For years, Congress has been encouraging the growth and creditor protection of retirement plans, particularly for baby boomers. But an increase in estate taxes and income taxes on retirement assets in poorly planned estates after 2010 may create a tax windfall for the state and federal budgets.

State Death Taxes. Prior to EGTRRA, the federal estate tax was offset by a credit for state death taxes. Roughly 38 states used the amount of the credit as their state estate tax – these states effectively took a portion of the federal estate tax as their tax. In 2005, as part of EGTRRA, the state death tax credit was fully phased out and replaced with a deduction, effectively eliminating the estate tax in most states.

States were forced to either lose the revenue they had received from the credit or “decouple” from the federal estate tax and impose new state estate taxes. Today, roughly half the states have state estate taxes that are decoupled from the computation of the federal estate tax.

The return of the state estate tax credit in 2011 could create some confusion. In decoupled states which impose their own state estate tax, there will be confusion because state death taxes will not relate directly to the federal estate tax credit and tax computations. A number of decoupled states have lower estate exemptions than the federal exemption, creating a possible state death tax when there is no federal estate tax. In some states, the combined state and federal estate taxes could exceed 60% because state estate taxes will exceed the federal state death tax credit.

Those states which have not enacted a new death tax (and which effectively lost any revenue from the estate tax in 2005), will suddenly see unexpected revenue. This change will effectively return dollars to the states that did not revoke their state statutes that coupled the state estate tax to the federal credit. For example, according to one source, Florida lost over $1.1 billion in revenue in 2006 from the elimination of the state estate tax credit. That lost revenue could now return to the state as an unexpected tax windfall.

Family Business Deduction. Planners and drafters of documents will have to deal with the return of the estate tax deduction for businesses that pass to family members. One of the more complicated pieces of federal estate tax, the deduction for qualified family-owned business interests (“QFOBI”) could be restored in 2011, albeit at a total deduction of $300,000 per decedent. Clients with closely held businesses should make sure their estate plans contemplate the potential restoration of the QFOBI deduction.

Generation-Skipping Transfer Tax. EGTRRA tied the lifetime and estate GST exemption to the estate tax exemption. On January 1, 2011, the pre-EGTRRA GST exemption rules may return and the GST exemption could become $1.1 million, plus subsequent inflation adjustments.

Other Provisions. While most of us are vaguely aware of the major changes that comprised other parts of EGTRRA, there are some additional sun setting provisions that we may have forgotten about, including:

· The expanded estate tax exclusion for conservation easements.

· Liberalized rules for deferred payment of estate taxes.

· Rules governing automatic allocations of GST exemption to lifetime indirect skips.

· Retroactive allocations of GST exemption.

Flexible Planning. Planning from 2009-2011 is going to require not only flexibility, but also a continuous review of how the client’s estate plan interacts with the changing estate and income tax rules. Flexibility is the key to planning in this chaotic environment. Among the flexible approaches that need to be considered are:

The expanded use of limited powers of appointment. Such powers of appointment will permit changes in the estate plan to account for changes in the family and in the law.

Planning that considers the impact on asset allocations to family resulting from significant increases in the exemption through 2010, followed by a drastic reduction in 2011. For example, if the intent is to pass the estate tax exemption amount to children from a first marriage and the remainder of the estate to a spouse from a second marriage, the client must be advised on how the changing exemption amounts will affect the passage of assets to each of the client’s heirs. Suppose a client in a second marriage has $5 million in assets. Does he want $2.0 million (2007-2008), $3.5 million (2009-2010), or $1.0 million (2011) to flow to children from a prior marriage? What amount is the surviving spouse expecting to receive?

Formula clauses that deal with various potential levels of estate and GST exemptions, depending on when the client dies. For example, in the above example, the client could create a formula that passes a set amount (e.g., $1.0 million) to his children, while any exemption amount in excess of the $1.0 million passes to a Bypass trust held solely for the benefit of the second spouse.

Plans that contemplate the use of disclaimers and Clayton QTIP marital trusts to maximize the tax avoidance possibilities in this unusual tax environment.

Finding creative ways to move appreciating assets out of estates that are expected to be taxable after 2010. Particularly for clients with estates between $2.0 million and $7.0 million, the combination of recession-depressed values, the lack of an inflation adjustment for the estate tax exemption and the increase in taxes as the estate grows can create an incentive to move appreciating assets out of the estate as early as possible.

If a wealthy client observes in 2010 that it appears the 2001 rules will return in 2011, the client should consider the tax planning technique of purposely paying gift tax, particularly when the gift tax rate in 2010 will only be 41-45%, while the estate tax rate in 2011 could top out at 60%. Run the math of moving a recession-depressed asset out of the estate at this lower rate, combined with the benefit of removing the gift tax payment from the taxable estate (if the donor survives by 3 years).

Spouse Dying in 2009 or 2010. Given a possibility of higher estate taxes in 2011, planners should evaluate how to most effectively plan the estate of a spouse dying before 2011. Some of the approaches may include the following:

Make sure to use the full estate tax exemption of the first to die spouse. For example, assume an elderly couple has a $5.0 million combined estate and one of them is in poor health. Consider moving assets into the unhealthy spouse’s estate before death. Suppose a client’s wife is terminally ill, but owns no assets. In 2009, the client transfers $3.5 million in low-basis assets to the ill spouse, who revises her will to provide that those specific assets pass into a bypass trust. However, be careful of losing the step-up in basis pursuant to Code section 1014(e).

Having assets taxable in the estate of the first spouse to die could potentially reduce the top estate tax bracket, and remove future appreciation on those assets from being taxed at the higher rate for deaths after 2010. For example, assume a married couple has a combined estate of $15 million, with each spouse having $7.5 million in his or her estate. Both spouses are in their 80s and their assets grow at 5% per year. One of the clients dies in 2009, while the other dies in 2012. Purposely paying an estate tax in 2009 on the entire estate of the first spouse to die (i.e., eliminating any marital deduction) could save the family over $500,000.

Income Tax Planning. While the significant estate tax exemptions last and fewer estates are taxable or if higher exemptions become permanent, much of tax planning may shift to trying to avoid income taxes rather than estate taxes. For instance, instead of lowering the value of assets to reduce estate taxes, clients with estates below the available exemption may actually want to increase the value of assets to obtain a higher basis step-up at death. The higher basis will reduce the income taxes paid by heirs on the sale of inherited assets and can create a higher basis for depreciable assets.

What Does This All Mean?

Whatever happens between now and January 1, 2011, virtually every estate plan will need to be reviewed in the next two years to examine the impact of the massive changes to both the income tax and transfer tax rules. For example:

Should higher income taxpayers convert to a ROTH IRA in 2010 to benefit their heirs, while electing out of paying the income taxes in 2011 and 2012 when their income tax brackets may be higher?

Should larger estates consider making taxable gifts in 2009 or 2010 when the overall gift tax rate is lower and recognizing that the gift tax is a tax exclusive tax (after three years)?

What is the impact on Bypass Trust planning when the estate tax exemption is changing each year, particularly for clients in second marriages?

Have the estate taxes been properly apportioned among the heirs?

Has the estate plan considered the impact of the increase in income taxes, capital gains taxes and dividend tax rates that occurs on January 1, 2011?

Does the estate plan properly account for the impact of state death taxes after 2010?

What is the impact on the computation of estate taxes of taxable gifts made before 2011?

Who benefits from this chaotic environment and the return of higher estate taxes? Seven groups will reap the greatest rewards: The states that remain coupled to the federal estate tax state credit will receive an unexpected revenue boost. Charities will see increased estate contributions (particularly of IRD assets) to avoid the higher taxes. Fee-based planners who provide estate planning advice and estate attorneys will be inundated with work. CPAs will have more tax returns to file. The insurance industry should see substantial increases in life insurance sales to fund estate taxes. And politicians will see increased contributions to their campaigns from people on both sides of the debate. And the client/taxpayer? He’ll be paying for all of it.

HOPE THIS HELPS YOU HELP OTHERS MAKE A POSITIVE DIFFERENCE!

Jeff Scroggin

Your Congress (Not) at Work

The NY Times reports this morning, from a well connected Democratic Senator (Pomeroy), that it appears likely that any extension (either permanent or temporary) of the current tax regime into 2010 will not happen this year, causing the “repeal” of estate tax to occur on Jan 1st in accordance with current law-replaced by an unworkable capital gains tax on inherited property.

The Will Doctor was heartened by the Senator’s certainty that next year your Congress will pass the permanent extension of the current estate tax system, retroactive from 1/1/2010. Planning is not as effective with an uncertain (and unworkable) tax environment-the threat of the return to a $1 million exemption is still real, if improbable. The “carryover basis” income tax on inherited property was proven as unworkable when they tried it in the seventies. We will stay tuned.

Bad News: Year End Approaches and Temporary Extension Possible

During the week of December 14, the House of Representatives is expected to consider the last appropriations bill for the year, the Department of Defense (DOD) Appropriations bill. As in past years, the House leadership is thinking of using the “last train out of the station” for the year as the vehicle to move “must do legislation.” Speaker of the House Nancy Pelosi (D-CA) said on December 10 that the leadership was considering using the DOD bill to move a jobs bill, extension of unemployment insurance, COBRA premium subsidy extension, and other provisions that expire at the end of the year. It is likely that a short term extension of the estate tax and “so called” extenders will hitch a ride to the House DOD bill; whether the Senate will go along with the plan remains to be seen.

The Will Doctor notes: this is bad news, and defers the permanent solution to an election year-so there exists an increasing possibility of a reversion to the statute in 2011, and the $1 million exemption equivalent that we all fear.

House Passes Extension of 2009 Estate Tax System

On December 3, the House by a vote of 225 to 200 approved H.R. 4154, the “Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Act of 2009.” The bill would make permanent the present-law estate, gift, and generation skipping transfer (GST) tax laws in effect for 2009.

Under changes made by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the estate tax and the GST tax were scheduled to be repealed for estates of decedents dying in 2010 and a modified carryover basis regime was to apply for 2010. EGTRRA made other changes to the transfer tax rules. All of its changes were scheduled to sunset after 2010.

Under the House-passed bill, the unified credit effective exemption amount for estate tax purposes would be $3.5 million for decedents dying during 2010 and later years. The unified credit effective exemption amount for gift tax purposes would be $1 million for 2010 and later years. The highest estate and gift tax rate would be 45%.

The GST tax exemption would equal the unified credit effective exemption amount for estate tax purposes ($3.5 million), and the GST tax rate would be determined using the highest estate and gift tax rate.

The House-passed bill would repeal the modified carryover basis rules that were to apply for purposes of determining basis in property acquired from a decedent who dies in 2010. Under the bill, property acquired from a decedent who dies after Dec. 31, 2009, generally would receive date-of-death fair market value basis (i.e., “stepped up” basis) under the basis rules in effect in 2009.

The House-passed bill would make permanent EGTRRA’s repeal of the State death tax credit; as under present law in effect for 2009, the bill would allow a deduction for death taxes paid to any State or the District of Columbia. In addition, the bill would make permanent the 2001 Act’s repeal of the qualified family-owned business deduction.

The House-passed bill would repeal the sunset of the EGTRRA estate, gift, and generation skipping transfer tax provisions scheduled to occur for decedents dying, gifts made, and generation skipping transfers made after Dec. 31, 2010. As a result, the bill would make permanent EGTRRA modifications to the rules regarding (1) qualified conservation easements, (2) installment payment of estate taxes, and (3) various technical aspects of the GST tax.

The Will Doctor points out that the various ancillary provisions concerning withdrawal notices, GRAT terms, restrictions on valuation discounts, etc., have been omitted in this simplified version. It is clear that the Senate will make some changes or additions, which may result in some additional changes in the final legislation. It is not certain the Senate can actually pass any measure this year, so we are still confronted with uncertainty.

House Prepared to Act on Estate Taxes

H.R. 4154, the Permanent Estate Tax Relief for Families, Farmers, and Small Business Act of 2009, has been added to the House floor calendar.  The bill would extend the estate tax provisions, due to expire at the end of this year under current law, and allow a $3.5 million estate tax exclusion and a reduction in the maximum estate and gift tax rate to 45% after 2009.  Specifically, it would repeal the provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) that eliminate the tax on estates and generation-skipping transfers and the step-up in basis provisions for property acquired from a decedent for estates of decedents dying after 2009.

On December 1, House Majority Leader Steny Hoyer (D-MD) told reporters that “this week we will be dealing with the estate tax” and predicted the House will permanently fix the estate tax problem. He also predicted extenders legislation will pass the House before its holiday recess this month.

Hoyer said the House leadership believes that a permanent estate tax extension is the best policy, with the estate tax exclusion set at a “reasonable level” of $3.5 million. He said this exclusion would protect all but the wealthiest, and would prevent small farms or small business from having to be dissolved in order to settle claims for estate taxes. Hoyer predicted that the estate tax bill to be on the floor “soon.”

The House Rules Committee is scheduled to meet on December 2 to report out the rule for H.R. 4154, the Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Act of 2009. The House could take up the bill as early as Thursday, December 3.

This new activity heartens our hope that the extension of the current estate tax regime will occur this year.  There were problems with other recent proposals such as a one year extension, which could have had unforeseen repercussions in an election year-and possibly even result in the imposition of the (n0w archaic) $1 million per spouse exemption equivalent due to a failure to act for political gain and finger pointing by one side or the other.