They said it could never happen in the good ole’ USA. But Congress successfully imposed retroactive tax increases on those who died between January 1st and October 31st of the year of the inauguration of William Jefferson Clinton. The pundits also said that George W. Bush would be unable to change the then existing tax law. But earthly miracles do happen, estate tax breaks were gradually increased. The “Bush” Estate Tax Act continues today, though all federal estate taxes expired January 1, 2010.

The stated goal of the Obama administration hasn’t changed since the campaign that got Obama elected: Redistribute the wealth. The ongoing focus seems to be on not only sharing the wealth but more on rearranging the wealth rather than producing more.

We know of too many family business situations that are in a “planning mode” or in limbo. Their excuses include “as soon as Congress gets their act together I’ll know what to do, then I’ll get my plans in order.” 

Though it seems more recent than year 2002, the “Bush Act” reads that anyone who dies this year will owe “zero” federal estate taxes, regardless of the size of their estate. The Democrats in Congress were preoccupied passing out “pork” to their fellow liberals, trying to buy the votes needed to get the so-called “health care” bill passed. Hence the tax act, which most expected to be revamped before the end of the year, wasn’t changed and continues on without the power to collect any estate taxes this year - so far...

Yes, the present law provides that estate taxes “begin” again in 2011, restating only a one million dollar exemption per estate. Gone, too, with this expiration are several provisions that have been proven over time to be critically important and helpful to family businesses.  But will any of the “big helpers” be reinstated?

Among the cancellations was the continuation of the Stepped Up Basis rules, which allowed the cost basis for appreciable assets (i.e. real estate) for income tax purposes to be increased from whatever was paid originally (minus depreciation if applicable) - or value when inherited - to present day fair market values. Hence if whatever was stepped up was sold at that new value – or less - no income tax was imposed. Now the existing tax act sets a limit on how much can be “stepped up” rather than be unlimited as before. No one in their right mind - considering how much money the Government needs - can expect to go back to “the good ole’ days” of 2009 and before.

Too few accept - or is it understand - what a wonderful income tax break the capital gains provision provides. More often than not, the capital gains rate - currently 15% is far less than what the ordinary income tax level for sales of such magnitude when real estate changes hands. (Remember Obama volunteered in his campaign that he wanted to raise capital gains taxes to at least 20% - a 33 1/3% increase.) Without changes, capital gains become 20% next year and taxes on dividends (now 15%) becomes 39.6%.

The Alternate Valuation process expired, too. This provision allowed a reduction of up to $750,000 per estate. Hence farm land, for example, could be valued at a lesser rate than fair market value. The basis was the formula of: comparable land rent, minus the real estate taxes, divided by the interest rate IRS allowed for intra family transactions.

For example, $4500 per acre dirt, that rents for $150 an acre minus $15 real estate taxes per acre, divided by say a 4 ¼% interest rate which meant the taxable value in the estate could be as low as $3175 per acre - a savings of 30%. 

To make this work, a living lineage heir had to agree to farm the land for ten years more or be susceptible to the forgiven taxes plus interest. (Ohio estate taxes could be reduced too – with the “must farm” being only a three year requirement.) 

The article by Attorney George Zola ("Should I Die Now... or Live For Another Year") goes into additional detail. We are reading in other trade journals where those who think they “know” the future believe that the $3.5 million exemption per estate will become the law again – but when?

Mr. Zola and I agree that there will probably be no tax laws passed this year that will help anybody. This is particularly true since all tax measures are born in the U.S. House of Representatives and every member is up for re-election this year.

And by doing nothing, the government will be again in a position to “soak the rich”, by having the
$1 million exemption go into effect as per the current law...  and be able to blame it all on W… rde