Congress creating mega-problems by failing to act on the federal estate tax

Ashlea Ebeling does a great job of explaining the tremendous problems which will now arise because of the failure of Congress to take action on the estate tax before the end of 2009.

Here are some excerpts from her article, Congress Throws Estate Plans Into Disarray, Forbes.com, Dec. 17, 2009:

“Beneficiaries will deal with uncertainty for years,” warns Kaye Thomas, a tax lawyer who opines on tax issues at his Web site, fairmark.com. “Having a brief period when the estate tax doesn’t apply will almost surely lead to questions as to whether wills and trusts drafted under the assumption that the tax would remain in force truly reflect the intent of the decedent,” he adds.

An unlimited amount can be left to a spouse tax-free. So estate planning documents drafted for couples often include formula clauses designed to preserve the estate tax exemption of the first spouse to die. But those clauses could spell trouble during the lapse.

Here’s how one such clause might backfire: A man has $6 million in net worth and his will gives his children from his first marriage the “exemption” amount with the rest going to his second wife. If he dies in 2009, when the exemption is $3.5 million, wife No. 2 is left with $2.5 million and the $3.5 million going to the kids is exempt from estate tax. Sounds fair and tax-savvy.

But if the man dies on Jan. 1, his will could be interpreted to leave the entire $6 million to his children with his widow left out in the cold. Imagine the family feuds–and litigation. * * *

In addition, if Congress reinstates the estate tax retroactively, some heirs of those who die during the no-estate tax time period are likely to put up a fight instead of paying big bucks in estate tax. * * *

The question for the courts would be: “Is the retroactive estate tax an unconstitutional ex post facto law?” To be sure, a constitutional challenge is a long shot. * * *

Heirs would have to wait until the constitutional issue is resolved in the courts before they get their inheritances. “It certainly will mean that inheritances will be delayed in whole or in part,” says Linda Hirschson, an estate lawyer with Greenberg Traurig in New York.

As a practical matter, people can take the position that the tax is retroactive and they’re not going to fight it, or they can take the position it’s not retroactive and gear up for a fight with the IRS and later in the courts. If they take the latter position, they’d better keep funds in the estate until things have cleared up, Hirschson says.