Congress Fails to Act, Allows 2010 Estate Tax Repeal

Contrary to most expectations, Congress failed to act by the end of 2009 to extend the estate tax at least to 2010, preventing the long-scheduled repeal of the estate tax.  The U.S. House of Representatives had passed an extension of the estate tax on December 3rd, but the U.S. Senate failed to consider a bill because of its pre-occupation on Health Insurance Reform.  Current expectations are that the Senate will consider an estate tax bill early in 2010 and extend the tax retroactively to the beginning of 2010.  However, there is no guarantee that this will happen as partisan politics could likely cause this issue to remain unresolved.  While the Congress has successfully hiked tax rates retroactively in the past, some advisors wonder if retroactively enacting a tax that no longer exists is constitutional.  Continued failure to act in 2010 will allow the "sunset" of the estate tax repeal in 2011 when the estate tax returns with a much lower exemption amount and a much higher tax rate.

Those who have estate tax planning documents in place face many problems and uncertainties.  What happens when assets are to be passed to trusts and others based upon formula clauses that reference tax provisions that no longer exist?  For example, many plans fund a credit shelter trust with an amount equal to the unused applicable exemption amount.  What does the trust receive if a person dies in 2010 when there is no estate tax?  In addition, the repeal of the estate tax brings along the dreaded carryover basis rules in which the income tax basis of inherited assets are no longer "stepped-up" (usually) to fair market value.  What if the estate tax is retroactively reinstated and it is challenged in court?  Many years of uncertainty could go by before we know whether the reinstatement was constitutional.  Congress's failure to resolve this important issue before the end of 2009 is irresponsible and shows a lack of true leadership.  The cost and pain of uncertainty inflicted upon families dealing with death and family inheritances is unconscionable.