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Death and tax uncertainty

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These days, it feels as though Uncle Sam is laughing at estate planning and wealth transfer attorneys.

The old adage by Benjamin Franklin about death and taxes being the only certainties is no longer certain, thanks to U.S. congressional inactivity about how to handle the federal estate tax that expires at the end of this year and is set to revert to decade-old levels. Effectively, that means a tax increase for people, though Indiana attorneys specializing in this area say they can’t even advise their clients on how to plan for what’s ahead.

“Not knowing what the prediction is going to be has caused a significant hurdle in planning,” said Indianapolis attorney R.J. McConnell at Bose McKinney & Evans. “Many families owning Indiana businesses don’t know how to plan for their estates, and that’s most of my client base. No one wants anything extraordinary here… most families just want to know what the rules are. That is, at a minimum, what Congress owes us.”

Attorneys say that even as we are about a month away from the start of 2011, no one is certain what taxes might be in place, when they’ll apply, and what income levels or rates might be attached. That means that some attorneys are taking a cautious “disclaimer-style” approach to any wills and estate plans, just in case something changes and a client doesn’t want to get stuck with any particular contractual tax reality.

In 2001, lawmakers lowered the estate tax rate and boosted the amount of money exempt from the tax through 2010. The rate gradually went from 55 percent in 2001 to 45 percent in 2009, before the tax evaporated completely this year. The amount of money that could be passed on tax-free also rose steadily, from $1 million to $3.5 million for dying individuals in 2009. This year, heirs have been able to pocket the entire estate without handing anything over to Uncle Sam.

But here’s the kicker: In 2011, the estate tax reverts back to 2001 rules for a 55 percent rate and only $1 million escapes taxation.

The House of Representatives passed a permanent extension to the 2009 rates and exemption last year, but it stalled in the Senate after a contentious debate about tax increases. The bill would have set a top rate of 35 percent on estates worth more than $5 million, but many Republicans pushed for a permanent repeal of the tax. That makes predicting the path this might take uncertain, as many who oppose the tax in principle don’t want the tax to skyrocket because Congress can’t forge an agreement.

Attorneys watching the legislative debate predict the estate tax issue could be tied in with a larger package addressing broader Bush-era income and capital gains tax cuts, but few are willing to place bets on the outcome.

Jeff Adams of Indianapolis, a member of the Indiana State Bar Association’s Estate Planning Section, says that the Republican shift resulting from the recent election goes in favor of those who favor a lower tax rate and higher exemption rate, so the decision could be pushed to the next Congress once that party takes over more control.

“We would have hoped that we’d gotten something at this point, or by the end of the year because of retroactivity concerns, but I’m not as convinced as I’d like to be at this point that anything will happen,” he said.

Adams said questions and concerns about these estate tax issues have been at the forefront of discussion for more than a year, as the federal estate tax has decreased and led up to what was clear would happen all along – a 2010 expiration and 2011 renewal. Because lawmakers haven’t acted on it, more confusion has been created for those trying to advise clients about the best way to plan. Seminars late last year and early this year have faded and there hasn’t been much guidance for attorneys trying to navigate these waters, he said.

For example, some questions about Indiana law exist pertaining to how funding clauses are drafted in documents addressing estate plans and wealth transfer. Some might opt for the maximum exemption amount, but it’s been unclear whether someone must fund these credit shelter trusts with all assets or none of the assets. A state statute trying to address that hasn’t clearly offered guidance on what the impact might truly be, he said.

Another issue has been the reporting requirements for the taxes and exemptions, Adams said. The Internal Revenue Service recently released a new form, but attorneys haven’t had a chance to completely process what it means.

“We will need practitioners who have any deaths this year to look at that and learn how they need to report,” he said.

But even more significant, some attorneys wonder whether Congress will revive the federal estate tax retroactively and how that might apply to deaths that happened this year, such as the case of billionaire New York Yankees owner George Steinbrenner who died in July. The estate of a person who died this year with an estate valued at $1.15 billion saved an estimated $500 million in what would have to be paid.

Proposed changes would seal the 2010 gap retroactively, meaning Steinbrenner and anyone else who died this year and made more than $3.5 million individually would have to pay the 55 percent estate tax.

Adams says he’s been instructing clients that it might be worth holding off on complete distributions from those 2010 deaths until it is clear what will happen. Financial planners can calculate a worst-case scenario tax and distribute whatever the excess amount might be, but then wait to do the entire distribution until Congress makes a decision.

“You can do some planning, but in many ways it’s wait and see,” he said. “I opt for disclaimer planning, where you give everything to a spouse and can then disclaim it to the estate and marital trusts rather than putting a built-in formula. Many of these formulas are out there in documents now, and this allows some flexibility.”

McConnell doesn’t believe that retroactivity would be possible, because it might raise constitutional questions about fairness that lawmakers would have to grapple with, such as whether the rules should have been made up ahead of time or as we go and then tacked on later to events that already happened.

For families, that might be devastating. They have experienced a death and then a year or more later heirs learn that they’re suddenly hit with a new multi-million dollar tax and forced to sell a business or part of their property in a current bad market.

“How is that fair for someone who has played by all the rules in place at the time?” he asked.

After the Nov. 2 election, Congress returned briefly before a weeklong-break for Thanksgiving, and then it was scheduled to return Nov. 29 for any lame-duck action that can be agreed on before the year ends.

If Congress were to opt for another year without an estate tax, McConnell says that would be a mixed blessing – a pro that his clients wouldn’t get slammed with a new tax, but a negative in that it would just extend the confusion. He’d prefer to see a lower exemption implemented with a higher tax rate, than have any tax rate that’s only in place for a year.

“That just continues the uncertainty we’ve had,” he said, “and it doesn’t help anyone.”•

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  1. From back in the day before secularism got a stranglehold on Hoosier jurists comes this great excerpt via Indiana federal court judge Allan Sharp, dedicated to those many Indiana government attorneys (with whom I have dealt) who count the law as a mere tool, an optional tool that is not to be used when political correctness compels a more acceptable result than merely following the path that the law directs: ALLEN SHARP, District Judge. I. In a scene following a visit by Henry VIII to the home of Sir Thomas More, playwriter Robert Bolt puts the following words into the mouths of his characters: Margaret: Father, that man's bad. MORE: There is no law against that. ROPER: There is! God's law! MORE: Then God can arrest him. ROPER: Sophistication upon sophistication! MORE: No, sheer simplicity. The law, Roper, the law. I know what's legal not what's right. And I'll stick to what's legal. ROPER: Then you set man's law above God's! MORE: No, far below; but let me draw your attention to a fact I'm not God. The currents and eddies of right and wrong, which you find such plain sailing, I can't navigate. I'm no voyager. But in the thickets of law, oh, there I'm a forester. I doubt if there's a man alive who could follow me there, thank God... ALICE: (Exasperated, pointing after Rich) While you talk, he's gone! MORE: And go he should, if he was the Devil himself, until he broke the law! ROPER: So now you'd give the Devil benefit of law! MORE: Yes. What would you do? Cut a great road through the law to get after the Devil? ROPER: I'd cut down every law in England to do that! MORE: (Roused and excited) Oh? (Advances on Roper) And when the last law was down, and the Devil turned round on you where would you hide, Roper, the laws being flat? (He leaves *1257 him) This country's planted thick with laws from coast to coast man's laws, not God's and if you cut them down and you're just the man to do it d'you really think you would stand upright in the winds that would blow then? (Quietly) Yes, I'd give the Devil benefit of law, for my own safety's sake. ROPER: I have long suspected this; this is the golden calf; the law's your god. MORE: (Wearily) Oh, Roper, you're a fool, God's my god... (Rather bitterly) But I find him rather too (Very bitterly) subtle... I don't know where he is nor what he wants. ROPER: My God wants service, to the end and unremitting; nothing else! MORE: (Dryly) Are you sure that's God! He sounds like Moloch. But indeed it may be God And whoever hunts for me, Roper, God or Devil, will find me hiding in the thickets of the law! And I'll hide my daughter with me! Not hoist her up the mainmast of your seagoing principles! They put about too nimbly! (Exit More. They all look after him). Pgs. 65-67, A MAN FOR ALL SEASONS A Play in Two Acts, Robert Bolt, Random House, New York, 1960. Linley E. Pearson, Atty. Gen. of Indiana, Indianapolis, for defendants. Childs v. Duckworth, 509 F. Supp. 1254, 1256 (N.D. Ind. 1981) aff'd, 705 F.2d 915 (7th Cir. 1983)

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  3. The family is the foundation of all human government. That is the Grand Design. Modern governments throw off this Design and make bureaucratic war against the family, as does Hollywood and cultural elitists such as third wave feminists. Since WWII we have been on a ship of fools that way, with both the elite and government and their social engineering hacks relentlessly attacking the very foundation of social order. And their success? See it in the streets of Fergusson, on the food stamp doles (mostly broken families)and in the above article. Reject the Grand Design for true social function, enter the Glorious State to manage social dysfunction. Our Brave New World will be a prison camp, and we will welcome it as the only way to manage given the anarchy without it.

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  5. Some in the Hoosier legal elite consider this prayer recommended by the AG seditious, not to mention the Saint who pledged loyalty to God over King and went to the axe for so doing: "Thomas More, counselor of law and statesman of integrity, merry martyr and most human of saints: Pray that, for the glory of God and in the pursuit of His justice, I may be trustworthy with confidences, keen in study, accurate in analysis, correct in conclusion, able in argument, loyal to clients, honest with all, courteous to adversaries, ever attentive to conscience. Sit with me at my desk and listen with me to my clients' tales. Read with me in my library and stand always beside me so that today I shall not, to win a point, lose my soul. Pray that my family may find in me what yours found in you: friendship and courage, cheerfulness and charity, diligence in duties, counsel in adversity, patience in pain—their good servant, and God's first. Amen."

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