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Dead estate tax costs US billions

By Kay Bell ·
Tuesday, April 27, 2010
Posted: 9 am ET

I hope Congress is happy. Legislative negligence by the House and Senate has cost the U.S. Treasury billions.

Because federal legislators let the estate tax die on Jan. 1, the heirs of a Texas gas pipeline tycoon have escaped owing the IRS anything.

Dan Duncan of Houston was the 74th richest person in the world when he died on March 28. He also was the first billionaire to pass away in this year that the estate tax also expired.

If Duncan had died three months earlier or ten months later, his $9 billion estate could have generated up to $4 billion for the IRS, notes the Trust Advisor Blog. But because there's no federal estate tax this year, the government gets nothing.

Good move, Representatives and Senators … Not!

Some Capitol Hill observers say this massive tax loss of revenue will prompt Congress to finally get its act together and reinstate the estate tax retroactive to the beginning of this year. That's what lawmakers promised to do at the end of 2009 as they headed out of Washington, D.C., for their holiday break.

Folks who get down and dirty in probate law, however, say that Duncan's death makes a retroactive estate tax even more unlikely. Big estates have high-powered (and high-priced) attorneys who will do everything they can to keep IRS hands off the estate.

Even if the lawyers ultimately fail, they'll tie up the case in courts for years, meaning that the U.S. will have to spend more money contributed by regular taxpayers to try to get some of what the uber-rich left their heirs.

Any tax or probate geeks up for helping me lobby Oprah to pick Charles Dickens' "Bleak House" as her next book club novel?

Not a good deal for some: While the absence of an estate tax might sound like a perfect situation, the old rules actually were better for some heirs.

Sure, some beneficiaries will receive larger estates because Uncle Sam didn't get anything off the top. But if they want to sell anything they were bequeathed, they could end up paying more in capital gains taxes.

The reason is that the estate tax law in effect through 2009 allowed heirs to value items they received at their fair market price on the date of the deceased owner's death.

But this option, known as stepped-up basis, disappeared with the estate tax.

That means your basis in the XYZ stock that Uncle Joe left you is the $1 per share he paid when he bought it 50 years ago, not the $100 per share it was selling for when he died. Now when you sell it for $120, instead of paying capital gains on the $20 per share amount ($120 minus the $100 value when you inherited the stock), you'll owe on $119 per share ($120 minus $1) profit. Even at the lower 15 percent capital gains tax rate that most individuals face, that's still a pretty tax penny.

Also, the amount of an estate that's free from tax is smaller. With the carryover basis change came a special $1.3 million (or an added $3 million in the case of property left to a surviving spouse) limit on the amount of capital gains that are exempt from federal taxes. That's less than the overall  $3.5 million per estate that was tax-free in 2009.

Pick your estate tax year: As is often the case with Congress, there's a move afoot to try to have the estate tax both ways.

Although there's not an official bill yet, there's been talk of giving estates a choice between dealing with the 2010 law of no estate tax or operating (and filing) under the 2009 estate tax rules.

The choice to pay estate taxes might be preferable for heirs who would do better with the stepped-up basis option.

Also, by not forcing a retroactive return to an estate tax, Congress would probably preempt any court challenges to the law.

Meanwhile, although it's a safe bet that Duncan's tax advisors had long ago set up a strategy to limit any estate tax bite, I'm sure that IRS accountants are lamenting their lost chance to collect at least something from the Texan's estate.

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June 03, 2010 at 10:39 am

It is not your money. Estates are not intangible, they are the result of the toil and effort of inviduals. U.S. citizens pay income tax, sales tax, property tax, telecommunications taxes, etcm what is left over goes into an estate which belongs to that family and taking more when someone dies is merely theft. Businesses are often sold and closed in order to pay these taxes, sure the feds get some money but the future revenue stream is eliminated and in the end we all lose.

farmer cal
April 28, 2010 at 5:27 pm

Are u aware that one of the main tenets of marxs manifesto was an estate tax? Do u realize that if u cannot pass wealth from one generation to the next, it is only matter of time before the populace as a whole become paupers? Combine that with a tax on labor and inflationary central banking, free markets and liberty among the people is impossible. When this countries freedoms and economy completely collapse, I hope u aren't aaround to help rebuild. I think your understanding of how the world works is more akin to soviet russia, than the u.s.

April 28, 2010 at 1:54 pm

I absolutely guarantee you that his estate would not have owed 4 billion in federal estate taxes. It would have owed some, no doubt but no where near that number because he would have structured his estate in a manor to limit those taxes.

April 28, 2010 at 8:52 am

You guys are like the lazy worthless relatives that show up when someone dies and start asking for the deceased stuff. Get a job, be productive and earn your own billions and you won't have to steal from the dead. Just because someone is dead doesn't give you (the government) a right to their stuff. They paid taxes all their life just like you hopefully did. Actually they probably supported most of your sorry tails.