I have a 75 year-old client* who is the trustee of his aunt’s trust. He had a stroke before the final tax return on his aunt’s estate was due and ended up filing the return nine months late. Approximately $20,000 was due in taxes, and nearly $10,000 was assessed in penalties.

Mercifully, because of the circumstances of his illness, it’s likely that the IRS will simply drop the penalties. Currently the law gives the IRS broad discretion to waive penalties where the taxpayer can show he or she made a good faith effort to obey the tax law.

However, under a new tax provision included in a health care bill before Congress, that discretion may be wiped away.

James M. Peaslee of the Wall Street Journal writes that the provision has escaped public notice because it is buried so deeply in the bill under a section dealing with abusive tax shelters. The language is unforgiving for those who deliberately fail to file their tax returns, but it is downright merciless for the “honest but errant” taxpayer, slapping Aunt Jane and her heirs with fees they don’t deserve.

Peaslee points out that similar changes to the penalty system in the past caused too many headaches for the IRS and taxpayers alike, prompting Congress to backpedal on discretion limitations. But not before tax professionals and taxpayers struggled for years trying to comply.

If this bill passes with that provision in tact, family members, estate administrators, and trustees aren’t going to get any sympathy from the IRS when their loved ones die.

James D. Perry

(*)Details have been changed to protect confidentiality.

 Yesterday in an article for The Wall Street Journal, Jonathan Weisman reported that once President-elect Obama takes office next week, Democrats in Congress will act quickly to end the repeal of the federal estate tax that’s scheduled to take place on January 1, 2010.

In his article, Weisman summarizes the interesting history of the forces behind President Bush’s 2001 legislation that led to the gradual increase of the estate tax exemption from $1,000,000 to the current $3,500,000 exemption. The article also reports that if the current exemption is locked in for the next 10 years, then only about 2% of estates will be subject to the estate tax and the U.S. Treasury will lose around $324 billion more than if the estate tax exemption is allowed to revert back to the pre-2001 amount of $1,000,000 - what it’s currently scheduled to do in 2011.

What does this mean for you and your family?  If you are like most of my clients, you will be more than covered by the $3,500,000 exemption –at least until the economy improves, houses start appreciating in value at double digit rates, and the stock market shoots up about 60%.

When all of those good things happen you can start to worry about estate taxes if you want.  As for me, I take the  Bobbie Mcferrin approach,  ”don’t worry, be happy” –  it’s estate tax repeal that is dead, not you.

As we welcomed in the New Year we also welcomed in the largest exemption from federal estate taxes ever - the new exemption is $1,500,000 more than last year’s exemption, which is the largest year to year increase ever.

That’s right, the federal estate tax exemption now stands at a whopping $3,500,000, meaning that married couples who take advantage of the AB Trust system can combine their exemptions and pass $7,000,000 on to their loved ones free from the federal estate tax. A single person can pass $3,500,000 without estate tax. This will eliminate the worry about federal estate taxes for most people.

The new year also brings an increase in the annual exclusion for gifting from $12,000 to $13,000, but the lifetime gifting exclusion still remains the same as it has been for many years - $1,000,000.
What’s in store for 2010, the year in which the federal estate tax is scheduled to completely vanish? Only time will tell.

Still don’t be lulled into thinking you don’t need to create an estate plan or review and update your existing estate plan because the estate tax is a non issue, or the economy is in the tank.

I believe the time is ripe to get back to the basics and understand what estate planning really is supposed to be - a systematic approach to making a plan for what happens to you and your property in case you become mentally incapacitated and making a plan for what happens to your loved ones and your property after you die.

That’s it, and while there’s nothing revolutionary about it, over the next few weeks I’m going to be blogging about some basics about estate planning that apply to most everyone. Keep in touch.