Death of the Death Tax for Business Owners?

Jan 25, 2010, 12:00 ET from Odin, Feldman & Pittleman

FAIRFAX, Va., Jan. 25 /PRNewswire/ -- Business owners who have followed the estate tax legislation may have felt they received a huge gift when Congress adjourned without passing legislation extending the estate tax into 2010.  According to Odin, Feldman & Pittleman Trust, Estate & Tax Planning Attorney John Dedon, "Right now, there is no estate tax.  Whether you own a business worth $3 million or $50 million, you can pass it to your children estate tax free."

Most estate planning advisors believed Congress would enact legislation prior to 2010 to avoid the disappearance of the federal estate tax.  Those of us sharing this belief were proven wrong, as we enter 2010 with no estate tax.  In 2011, the estate tax returns.  "For business owners ready to celebrate the death of the death tax, it is premature," said Dedon.

Under current law there is no estate or generation skipping tax; tax free gifts are limited to $1 million with a tax rate of 35% for amounts exceeding $1 million; and, although there is no estate tax, there is an income tax for inherited assets.  The income tax results from the elimination of the inherited assets' "stepped-up" basis.  In contrast to prior law, inherited assets now have a carryover basis.  There is a $1.3 million tax exemption, and a $3 million marital exemption.  But inherited assets sold at a gain above these exemption amounts will be taxed at ordinary or capital gain rates.

"The elimination of the step up in basis is one not widely discussed but very significant," said Dedon.  He continued, "Some have speculated that a majority of small business owners will pay more tax under the new law as it currently exists.  Since many businesses are worth less than $7 million (the amount a business owner and spouse could protect from estate tax under 2009 law), but over current exemption amounts for basis purposes, there would be more tax to pay."  

According to Dedon, "The planning options business owners should consider under the 2010 law are now being analyzed and considered; however, the following are some basic questions, and speculated answers (emphasis on speculation):"

  1. Will Congress reinstate the estate tax in 2010?  "Probably.  There is too much tax revenue at stake, not to mention the chaos the law is creating."
  2. Assuming Congress addresses the estate tax, is the exemption amount $3.5 million or as much as $5 million?  "Nobody knows, but these are the range of exemption amounts widely discussed."
  3. What if you die before the estate tax is reinstated, is it constitutional to apply the tax retroactively?  "Nobody knows when Congress can and cannot enact laws applying taxes retroactively.  This constitutional issue will likely be answered by the Supreme Court."
  4. Is it possible nothing is done all year and the exemption amount is only $1 million as scheduled in 2011?  "This is possible, but not likely."
  5. Most importantly, what is a business owner to do?  "There is not one answer.  Much depends on the value of the business, your existing plan and your objectives."

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