La. Accountants Prep Clients For Return Of Estate Tax

There's a running joke among accountants that if Grandma plans on showing up to Thanksgiving dinner this year, she had better bring a food taster.

That's because there's no estate tax applied to anyone who dies in 2010. But that doesn't mean an entirely free ride for heirs, accountants say. And looking ahead to 2011, the estate tax is scheduled to return with a much lower exemption than what was in place in 2009.

"For those who have older (retirement) plans, they really need to sit down with an expert and get things straightened out now," said Charles Allen , president of the Metairie accounting firm Allen and Baxter.

While there's no estate tax this year, individuals inheriting money could face some hefty capital gains taxes, he said. For this year only, the tax law states that when a person dies, his or her assets are valued at the original price the person paid for them instead of what they're worth the day the person dies.

So if a person inherits shares of stock that have gained value over the years, the heir would owe capital gains tax on the appreciation when he sells the shares.

"This is a big issue for 2010," Allen said.

Congressional decision

The 2010 tax stipulation has meant more work for Jennifer Bordes , director of the tax consulting services department at LaPorte Sehrt Romig Hand accounting firm in Metairie. She reports about 30 percent more clients inquiring about estate tax than last year.

"I would say that because of the uncertainty, there's been a lot more concern and confusion as to what is going on and what we think will happen," Bordes said. "But truly, the decision to retain or reform (the tax) is a political one."

The progression of the estate tax dates back to 2001, when Congress passed legislation to gradually increase the estate tax exemption from $1 million in 2002 to $3.5 million in 2009 with a full repeal of the tax in 2010. Unless Congress revisits the issue before 2011, the exemption is scheduled to revert back to $1 million with a tax rate of 55 percent on anything that isn't exempt.

With midterm elections and the holidays looming, experts say chances are slim that Congress will pick up the issue before the end of the year.

"The hope is for 2011 and beyond, they will reach an accord and finalize some type of legislation," Allen said. "The most popular amount the pundits come up with is a $3.5 million exemption with a 35 percent tax rate."

Several theories surround Congress' inaction on the estate tax in recent years, including the economy, the 2008 presidential election and November's midterm elections. But there's one that hits closer to home: Hurricane Katrina.

Allen recalls attending an August 2005 planning meeting in Mobile, Ala., when lawmakers were discussing the issue.

"They said that come fall they were going to address the estate tax issue. Katrina hit and it got put on the back burner, and the rest is basically history," he said.

'A middle-class tax'

With the 2011 estate tax exemption expected to be $2.5 million lower than what it was two years ago, many more taxpayers will be susceptible to it, said Ken Weiss , head of estate planning at McGlinchey Stafford law firm in New Orleans.

"One million dollars makes it a middle-class tax for all intents and purposes," he said. "Between insurance, savings, 401(k) and their home, a lot of people are worth $1 million."

But there are less obvious ways investors might be accumulating money, said Jack Sloan , a certified financial planner and tax accountant.

"Some of my clients say, 'I have investments but not more than $1 million. Then I ask a real crucial question: Do you own life insurance? And they say, 'Yes, I have a $1 million policy,'" Sloan said. "Because you own your own life insurance policy, that could be subject to the federal estate tax. On that one thing, you just used up your million-dollar exemption."

There are things individuals can do next year to ease the sting of the lower estate tax exemption, but advance planning is key, experts say.

Even though there is no tax on money transferred between spouses at the time of death, it's important for both spouses to use their estate tax exemption when they die, Allen said.

For instance, if both spouses die in 2011 and each uses the $1 million exemption, $2 million of their estate will be tax-free. But if only one spouse uses the exemption, only $1 million will be untaxed.

Gift giving is another way to avoid or lower estate taxes. A person can donate up to $1 million in his lifetime to charities and other causes without being taxed.

"By gifting, you're reducing the size of your estate. Because the exemption is decreasing, the bigger your estate is the more tax you're going to be face with," Bordes said.

With 2011 just two months away, Sloan worries people have become complacent about the approaching tax and says it's time for people to start thinking about their assets.

"I think we need to start ringing the bell and saying, 'Wake up. The estate tax is back,'" he said.