February 2010 letter to clients

SCHLENNER WENNER & CO. NAMED IN THE TOP 25

Schlenner Wenner & Co. was recently included in the top 25 Accounting Firms in Minnesota. This ranking was done by the “Twin Cities Business” magazine and included in their 2010 Annual Business information guide.

Schlenner Wenner & Co. currently employees 65 people of which 10 are partners and 27 are Certified Public Accountants. We serve clients throughout Minnesota from our five offices in Central Minnesota.

ESTATE AND GIFT TAX IN LIMBO

The estate and gift tax area is currently in a state of confusion. The confusion stems from 2001 when a law was passed that phased out the estate tax during the rest of the decade and eliminated the tax for 2010. The problem is the elimination only lasts for one year because it’s all set to come roaring back in 2011 at the high maximum tax rate (55%) and the low exemption amount ($1,000,000) that applied before the tax law change. In other words, a person with a $10 million dollar estate who dies in 2010, under the current law, will pay no federal estate tax. If this same person holds out and dies in 2011 the federal estate tax due would be over $5 million dollars.

This state of confusion doesn’t just affect people with large estates. The rules regarding step-up in basis are all different during 2010 and, while smaller estates will not be affected, estates of over $1.3 million could be subject to reduced step-up if there is not a spousal beneficiary. This could result in additional income tax over the long run as well as problems during the administration of the estate.

If you had asked any estate tax planning expert early in 2009 if they expected this set of laws to still be in effect at this time you would not have received many answers to the affirmative. At the end of 2009 when it became evident that no changes would be made before the repeal of the estate tax in 2010 the Democratic leaders of Congress were vowing to resurrect the tax later in the year but retroactively to January 1st. So far that has not happened and there is bound to be litigation from the estates of people dying during the “no estate tax” period. The question to the courts will be whether the retroactive estate tax is even constitutional. In the meantime, estates will be held up while the issue is litigated.

So we are left with uncertainty about what set of laws will be applied and whether our current estate planning documents will be effective in carrying out the decedent’s intended goals. Typically trusts and wills use formulas that include references to the estate tax exemption amount. Since for 2010 there is no exemption amount because the tax has been repealed, the application of these formulas could result in allocations of assets that do not meet the intent of the decedent. For example, a will that leaves an amount equal to the exemption amount to the decedent’s children from a previous marriage and the remainder to a current wife would result in very different results depending upon the year of death. For a decedent with a $6 million dollar estate and a death in 2009 this formula would leave $3.5 million to the kids and $2.5 million to the current spouse. If this same person died in 2010; under the current law the full $6 million would go to the kids. Do you see the potential for some more litigation?

This uncertainty created by our politician’s inability to act on these estate and gift laws has created potential problems for estates of all sizes. Hopefully our politicians will be able to finalize something during 2010, but in the mean time we recommend that you be aware of these issues. We welcome you to discuss your concerns with us and will gladly help with recommendations regarding steps you need to protect yourself from these potential pitfalls.

Sincerely,

SCHLENNER WENNER & CO.
Certified Public Accountants
    & Business Consultants

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