Adam Katz is a senior associate at Harrison & Held, LLP. He concentrates his practice on federal & state tax matters, mergers & acquisitions, entity structure and formation, commercial finance, and non-profit law. Adam can be reached at (312) 753-6110 or firstname.lastname@example.org. Comments on all posts are welcome!
2010 was a wild one. Not much more could put all tax lawyers on the edge of their seats more than the possibility of zero estate tax for an extended period of time. Well, we already know the end of this fairytale: It happened and our collective jaws dropped. A number of high profile figures passed away and utterly massive quantities of wealth passed to their heirs tax-free. Finally, in December of 2010, Congress signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.
The Act set the federal estate, gift, and generation-skipping transfer tax rate at 35 percent and established an exemption from the same at $5 million a person for the years 2011 and 2012. In years prior to 2010, the gift tax exemption was $1 million and separate from the $3.5 million estate and generation-skipping transfer tax exemptions. In an ideal world, that increase in the exemption for 2011 and 2012 allows for an increase in the amount of untaxed wealth that can be passed to heirs whether during a person’s lifetime or upon their passing.
Yet, a frightful shroud hangs on the horizon in the form of those eager senators and representatives who make up the Joint Select Committee on Deficit Reduction, otherwise known as the “Super Committee.” No, the Super Committee is not comprised of your favorite superheroes in bright neon spandex (though that would make C-SPAN infinitely more entertaining), but they were tasked with saving the nation through issuing recommendations on how to reduce the deficit by at least $1.5 trillion over the next 10 years. For some time, a mysterious rumor has been floating around that the Super Committee may issue a recommendation that the $5 million gift tax exemption be returned to $1 million. Furthermore, the rumor asserts that the gift tax reduction may occur before 2013 or as soon as November 23, 2011… i.e. next week. Other than one million attorneys, accountants, and financial planners speculating, there is little or no evidence that this rumor is anything more than a rumor.
Now, I believe this rumor has minimal bite. The odds that Congress approves legislation reducing the gift tax is unlikely to me. However, this whole situation and the fact that so many tax professionals are speculating to the point of informing their clients with formal letters of a possible change based on a simple toothless rumor raises interesting questions for attorneys. First, is it our job to keep track of every rumor about new tax legislation when these rumors are likely false? Second, if we are supposed to keep track of new tax legislation rumors, how does that affect attorney liability if we are wrong about the rumors?
While I believe attorneys should keep abreast of legitimate tax legislation proposals, I think keeping track of the simple rumors is not our duty. Our duty is to act upon what the law is and what the law reasonably could be. It is impossible to keep track of all of the baseless and almost baseless rumors and, further, advising clients on rumored legislation that never materializes could incur liability. Conversely, if it is our duty to track rumors, how do we account for the legislation that passes without any prior news leaks? Are we liable then for not having known what actions Congress would take? Are we liable for being wrong about what actions Congress takes? Attorneys are not handed a crystal ball with their diploma.
In this case, I am confident in saying it is unlikely a reduction in the gift tax or any other tax exemption would occur with less than one week’s notice. It would simply be too difficult for people to adjust their estate and gifting plans. However, like I said before, a shroud hangs on the horizon and our collective jaws have dropped before. While attorneys are not given crystal balls in law school, we must be prepared for any and all possibilities…duty or not.