The United States has taxed the transfer of wealth since colonial times. The basics of our current estate tax system began in 1916. As with all taxation there are always pros and cons as to whether there should be such a tax and how it should work. There has been many positions on this fiscal philosophy of taxing wealth transfers as to whether it changes individual behavior such as reduced savings, and stifling entrepreneurship, to mention a few. Many people have many different views; for example, a few like Judy Pigott and Bill Gates Sr. advocate higher estate taxes for the wealthy; however the majority of commentaries complain about the estate tax as it taxes the same monies twice (after income taxes) and advocate that it should be eliminated.
As most know since January 1, 2010, we have no estate tax but it will return on January 1, 2011. An important issue that has occurred in the past five months, while there has been no estate tax, is that there is a limited increase to basis to date of death value, and therefore the basis on many assets will be carried over from the decedent to the heir and this may cause potential lawsuits from unhappy heirs and IRS penalties. And, as history shows , every time the carryover bases issue has been discussed the record keeping for tax basis has been a big burden both for taxpayers and the IRS. Also, with no estate tax and because of the formula clauses in many estate plans which avoids losing estate tax exemptions, all of the assets may be distributed to the credit shelter trust and that may result with disgruntled heirs with more lawsuits.
The above describes problems that are real. The inconsistencies are also real; the estate tax has been eliminated during these past five months, but regarding estate and gift tax filings of previous years, the current tax audits are tougher than ever especially with respect to valuation issues and use of entities such as family limited partnerships. Apparently someone in the Treasury Department is taking the position that the estate tax is important. Yet, because of inaction by the legislative branch, millionaires and one billionaire has died so far in 2010 without any estate tax.
The Hill publication reports that Senator Finance Chairman Baucus indicates a small business bill will occur very shortly and it will include a fix for the estate tax. House Majority Leader Hoyer said that they expect to work on the estate tax in the very near future, and Chairman of the House Ways and Means Committee Congressman Levin stated recently that he expects to enact a retroactive estate tax.
The next few weeks should prove very interesting with Congress tackling the taxation of wealth transfers.