South Florida Estate Planning Law : Florida Estate Planning Lawyer & Attorney : David Shulman Law Firm : South FL Wills & Trusts

 Next week I will be attending the 44th annual Heckerling Institute on Estate Planning which is sponsored by the University of Miami Law School.  Heckerling is a week-long conference on estate planning, administration, tax, and other related issues.  This year should be especially interesting because of the current repeal of the estate tax.  

I hope to post blog updates from the conference, especially if I gain any insights as to what is happening with the estate tax.

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If you read the tabloids, or even the mainstream press, you may have come across the sad tale of Casey Johnson. Johnson was one of the great-great granddaughters of Robert Wood Johnson I, and an heiress to the Johnson & Johnson fortune. Her father, Woody Johnson, owns the New York Jets.

Johnson's life, to put it mildly, was a mess. A contemporary of Paris Hilton, she had a long history of alcohol and drug problems, public battles with family members, and a recent"engagement" to reality tv star Tila Tequila (if you don't know who that is, do your own internet search. But the images might not be safe for work). The thirty year old woman was found dead in her home on January 4, 2010, leaving behind an adopted four year old daughter. Police are saying that she could have been dead for several days.

I'm sure there are going to be criminal investigations, recriminations, lawsuits, and possibly a messy probate, which I may or may not write about as it happens. For now, I am only interested in one aspect of this: the estate tax.

I don't know what Johnson's financial situation was at her death, I hear that she was "cut off" and broke, but it's also quite possible that she had substantial assets in trust that would be includable in her estate for estate tax purposes, but was beyond her reach for her own protection. This amount could be several million or even tens of millions of dollars.

As I have been discussing, 2010 is currently the year without an estate tax. That means that if Johnson died in 2010, no matter how large her estate was, it will not be subject to the federal estate tax. If she died in 2009, then her estate is taxed at 45% of its value over $3.5 million . If she had a taxable estate of $10,000,000, then her estate will owe $2,925,000 in taxes to the federal government. . I believe (although I do not know for sure) that her death certificate shows the date of death as the date she was found, January 4, 2010. However, if the evidence shows that she died in 2009, then her estate is liable for the tax.

Let's take this one step further. Assume that she did die in 2010. Most people think that Congress is going to retroactively reinstate the estate tax back to January 1, 2010 at some level -- probably the 2009 exemption of $3.5 million. Most legal scholars also believe that it is constitutional for Congress to do so. If someone dies during that time and owes a minimal amount of tax, then it's likely their estate will just pay it, instead of challenging the constitutionality in court, which of course requires hiring attorneys. But if there is enough money at stake, then I wouldn't be surprised if Johnson's estate does challenge it. It would be worth the risk to see how the Roberts, Scalia, Thomas, Alito Court would rule.

Of course, none of this would be an issue if Congress weren't so deadlocked, so incompetent, so unable to get anything at all done. But that's for another day.

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I honestly never believed that it would happen.

I never thought that Congress would actually be this irresponsible.  After all, they've known that it was happening since 2001.  But here we are.  It is 2010 and there is no estate tax.  For now.

What does this mean?

First, remember that in 2009, the estate tax only applied to a person who died owning assets in excess of $3.5 million.  So for most people, it means absolutely nothing.  

However, along with the temporary repeal of the estate tax, there is also a temporary repeal of what's known as step up in basis.  Let me explain.  Generally, when you inherit assets from someone, your basis in the asset is the value at the time of death.  So that when you go to sell the 100 shares of IBM that you inherited from Grandma, you don't have to figure out how much she paid for it.  You only have to figure out what it was worth at the time of her death.

With the repeal of the estate tax, there is also a repeal of the step up in basis rules.  Instead there is "carry-over basis" and a decedent's estate will have $1.3 million of basis to spread around their various assets.  How will this be done?  I don't know.  But the effect is actually a tax increase on estates valued between $1.3 million and $3.5 million.

Then, one  year from now, the estate tax comes back to life with a $1 million exemption, and a 55% rate.  

Of course Congress could change all of this.  Most people agree that they can retroactively change the law to reinstate the estate tax.  I'm sure there will be lawsuits if they do though.  

What is going to happen?  I have no idea and anyone who says they do is lying.  I was so sure that they weren't going to let repeal happen, and I was wrong.  So we'll just have to wait and see.

But don't throw momma from the train just yet.

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