By MATT CHANDLER
mchandler@bizjournals.com | 716-541-1654

In the summer of 2009, the buzz in the estate planning community was speculation over when Congress was going to amend the federal estate tax laws signed under the Bush administration.

The law had been set to offer a one-year repeal of the federal estate tax (in 2010). Given the 2009 exemption rate of $3.5 million and a tax rate of 45 percent, all eyes were on Washington to see when and how politicians would fix the tax issue. More than a year later, they'te still waiting.

"In the professional community, the opinion was almost universal that something would be done before the end of 2009," said Tom Hyde, leader of the estates and trusts practice group at Hodgson Russ LLP. The indecision on the part of the 111th Congress was politically driven, he said.

The Obama campaign platform said he wanted an extension of the 2009 rate (45 percent tax rate and a $3.5 million exemption). A number of bills would have done that, but the Republicans wanted either a permanent repeal or there were some Republican bills that wanted a $5 million exemption and a 35 percent rate," Hyde said. "Now I think it is just that neither side sees it as in their political interest to compromise."

Politics aside, he said the inaction of lawmakers has left his clients wondering where they stand and how they should be preparing their estates in lieu of the federal estate tax limbo.

"One of the biggest challenges executors face when dealing with the estates of people who died in 2010 is not knowing if the law that was on the books when they died is the law that is going to apply," Hyde said.

That uncertainty is fueled by speculation that Congress eventually will take action. And when a new tax law is signed, it will be retroactively applied to Jan. 1. The consensus among area legal and tax experts is that while there may be precedent for such a move, it would not necessarily be politically prudent.

"Earlier in the year, I thought a retroactive fix was likely to occur, but now I'm starting to think we may not see that," said Larry Franco, an estate planning attorney with Hurwitz & Fine PC. "We certainly aren't expecting anything before the elections in November, and at that junction I just think it would be impractical to have a retroactive enactment back to Jan. 1 of this year."

Cheryl Jankowski, meanwhile, is a senior tax manager with Chiampou Travis Besaw & Kershner LLP in Amherst. She said she agrees with Franco that a retro tax fix is unlikely.

"For our clients who have died in 2010, now that we are heading to the fourth quarter, we don't feel there will be anything retroactive," Jankowski said. "Of course, we don't know for sure. But the further we get into 2010, the less likely it seems."

While Hyde agreed on the issue of retroactively applying the tax, he said there is precedent to do so.

"I think there is almost no doubt that constitutionally they could make it retroactive," he said. "This isn't a new tax or a retroactive change of rate, and I think it is probable that retroactivity would be sustained. But I also think the politics would argue against doing that."

If enacted, it's sure to be an issue that will be tied up in the courts for years, Hyde added.

Amid the uncertainty, area estate planners are taking a wait-and-see approach with clients.

"We are communicating with our clients that have estate plans predicated on there being an estate tax," Franco said. "In the past, we have drafted wills that reference the credit shelter amount (estate-tax exemption), and wills that now reference that tax shelter are ambiguous in light of the repeal of the federal estate tax. So we are working with our existing clients to alert them of the dramatically different rules."

On the accounting side, Jankowski said, her firm is in a holding pattern, as well.

"We are always looking for ways for clients to plan around the estate tax," she said. "We try to do that planning to minimize their estate tax, but we are kind of stuck right now as to what advice to give clients. We know something will happen in 2011. We just don't know what."

A big concern is that Congress will sit on the issue through the end of the year, at which time the federal estate tax returns - this time with a $1 million exemption. If that were to take effect, untold numbers of Americans who were nowhere close to reaching the $3.5 million threshold may find themselves facing a deep cut into their estates.

"We have three sets of rules that apply for three years in succession, which is just an absurd state of affairs in the federal estate tax realm (2009: $3.5 million exemption; 2010: no estate tax; 2011: $1 million exemption)," Franco said. "An awful lot of people who never thought they would be subject to (federal) estate taxation are going to be hit with a big tax bill if this isn't corrected before Jan 1, 2011."

In a strange twist, if Congress opts not to retroactively apply the new federal estate tax, when it eventually is signed into law, there is a certain financial advantage to dying in 2010.

"We're not recommending anyone pull the plug before the end of the year, although it definitely saves a lot of estate taxes," Jankowski said. "If you think of a business owner, George Steinbrenner would be an excellent example - no estate tax. Glen Bell, the owner of Taco Bell - again, no estate tax. "

For Western New Yorkers who are at the point of estate-succession planning, and for those who have long ignored the issue of a federal estate tax because of its astronomical deductions, local experts say it's time to pay attention.

A single person who has developed a career, owns a home and carries some life insurance or a 401(k) may be surprised to find that on paper, they are a millionaire and thus subject to potential taxation in 2011. It's no longer a tax on the rich. If no change is made, the federal estate tax may soon become a tax on the middle class. With almost universal belief last summer that this was a non-issue, how did it get to this point of confusion, ambiguity and frustration?

"I think they were so focused on health care, Congress took their eye off the ball," Jankowski said. "I don't think there is any good explanation for how we ended up here other than Congress not handling anything."