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P & T Hot Tip Emailees:

I regret to advise that we may enter 2010 with no federal estate tax or generation-skipping transfer tax and the imposition of carryover cost basis, where the cost basis of an asset goes back to the historical cost paid for by the decedent many years earlier. In addition, 2011 will see the reimposition of a higher 55% tax rate and a $1 million applicable credit amount.

If this happens, it will be a mess!

Over the last 10 years, almost no one thought that Congress could be this irresponsible. But here we are.

Here follows the Wall Street Journal article from this morning. If this happens, and it appears that it will, it will also mean that many wills and trusts will have to be interpreted because they will have been drafted with formula clauses which relate to the federal estate tax, the applicable credit amount, the unified credit, etc. Please note also that the gift tax is not repealed.

By JOHN D. MCKINNON and MARTIN VAUGHAN

WASHINGTON -- The federal estate tax will likely expire as scheduled Jan. 1, creating dilemmas for politicians of both parties and roiling tax planning for thousands of Americans.

Senate Democratic leaders Wednesday failed in a last-ditch effort to pass a short-term extension to override the tax's expiration, a process put into motion during the Bush administration. That virtually ensures that the tax will disappear Jan. 1.

Under 2001 tax legislation, the federal estate tax is set to disappear in 2010. If Congress does nothing, it pops back into effect in 2011, at the Clinton-era top rate of 55%, with a $1 million exclusion. Currently the top rate is 45%, with a $3.5 million exclusion.

Most Democrats were pushing to extend the current rate permanently. Republicans, by contrast, support a 35% top rate and a $5 million exclusion as a second-choice substitute for a permanent repeal.

Lawmakers already were promising Wednesday to revisit the issue early next year. One option is to pass a new tax retroactive to the beginning of 2010.

"It's a completely unacceptable situation," said Rep. Earl Pomeroy (D., N.D.), who led an unsuccessful effort in the House to extend the tax. He added that there was "100% certainty that Congress will move to address this issue early" in the new year.

Republicans, meanwhile, cheered the impending repeal as a symbolic and substantive victory. "I don't see a problem -- we aren't going to have an estate tax next year, " said Sen. Jon Kyl of Arizona, a leading strategist on the issue. Mr. Kyl conceded the one-year repeal creates complexities for tax planners and agreed Congress will "likely" address the issue with new legislation in 2010.

The political calculus for both sides will be dicey, however. Republicans believe they will have leverage next year for achieving their 35% rate, because Democrats must argue for a 45% rate at a time when the rate is zero.

But at some point, Democrats believe they will gain the upper hand in bargaining. That is because Republicans, by resisting a deal on 45%, would risk allowing the rate to snap back to 55% in 2011 and beyond.

Even if Congress moves quickly to pass an extension of the tax next year, there could be lingering confusion because of likely legal challenges, particularly if Congress attempts to make it retroactive to the beginning of the year.

"I just think it's outrageous that we've not provided guidance to upper- and upper-middle-class people so they can do proper planning," said Alan Rothschild Jr., a lawyer in Columbus, Ga., who is chairman-elect of the American Bar Association section on estates. The combination of depressed asset values and confusion over estate-tax rules, he added, "has led a lot of people to sit on the sidelines when they should very aggressively be doing planning."

Frank Blethen, publisher of the Seattle Times and a longtime critic of the estate tax, applauded the repeal and urged making it permanent, saying it could help local family-owned businesses add jobs. Some wealthy business people, including Warren Buffett, have favored an extension of the estate tax.

Congress could also be spurred to action next year by a little-noticed provision of the 2001 bill. After the estate tax lapses, some people who inherit property and later sell it could find themselves paying higher capital-gains taxes. That is because they will have to figure their gain based on the price the decedent paid for the asset, instead of the value at the time it is transferred from the estate -- typically a much more generous basis for the recipient.

House officials estimate that about 6,000 estates next year will get relief from the estate-tax repeal. But more than 70,000 would have new capital-gains liability from the provision on capital gains. "The dirty little secret about the next chapter in estate-tax law is that more people will get a tax increase than a tax break," Mr. Pomeroy said.

Write to John D. McKinnon at john.mckinnon@wsj.com and Martin Vaughan at martin.vaughan@dowjones.com

Please read the important information relating to tax advice at the bottom of this web page.

Best regards,
Bob Wolf, Moderator

“Any tax advice in the foregoing message was not intended or written to be used, and cannot be used by any person for the purpose of avoiding tax penalties that may be imposed with respect to the matters addressed. Some of that advice may have been written to support the promotion or marketing of the transactions or matters addressed within the meaning of IRS Circular 230, in which case, be advised that the advice was written to support the promotion or marketing of the transaction(s) or matter(s) addressed, and you should seek advice based on your particular circumstances from an independent tax advisor.”