September 29, 2009 - Samuels Yoelin Kantor LLP

Caution! The estate tax has a hole in it. Not to worry – a bit of legislative spackle is on the way.

The estate tax (with its current $3.5 million exemption) is just a few months away from expiring – albeit for one year. Then, if Congress fails to act, the estate tax will reappear in 2011 with a $1 million exemption. This odd scenario exists because of the 10-year expiration of the 2001 tax bill passed early in the Bush Administration.

A recent article in the publication The Hill quotes experts and Congressional staffers saying that Congress will enact a one-year “patch” which will extend through 2010 the current $3.5 million estate tax exemption and tax rate of 45 percent. The congressional staff members indicate that because Congress is busy dealing with healthcare reform, a long-term decision for the estate tax will have to wait until 2010.

Both the Obama administration and Senate Finance Chairman Max Baucus have proposed making the $3.5 exemption and 45 percent top rate permanent. However, Republicans and some conservative Democrats have suggested a $5 million exemption and a top rate of 35 percent. With such splits present not only between the parties but also with the Democratic majority, a one-year “spackle” approach might lead to the scenario described in the blog article by my co-blogger and law partner, Ted Simpson. Under this scenario, election-year gridlock and inaction by Congress could lead to the return of the $1 million exemption in 2011. Spackle may have its limits.

I welcome your comments and questions.

From time to time we will publish recent local cases or legislative bills:

Tupper v. Roan, 227 Or App 391, — P.3d – (2009)

Background: As part of a divorce decree, the decedent promised to obtain a life insurance policy for the benefit of his wife as trustee for his child. Decedent never did this. Instead, he obtained a life insurance policy naming his girlfriend as the beneficiary. The ex-wife sued the girlfriend asking the court to impose a constructive trust on the portion of life insurance ($100,000 of the $600,000) that decedent promised to obtain.

Holding: In order to obtain constructive trust over the life insurance policy, the ex-wife must prove that the decedent gave the beneficiary property that originally belonged to the children and that the beneficiary knew or should have known of the wrongfulness of the decedent’s actions. The ex-wife must show the beneficiary is unjustly enriched. The fact that the divorce decree included a provision that stated the ex-wife would have constructive trust of any life insurance policy if he breached his obligation was unenforceable against the girlfriend because she was not a party to that agreement.

Note: If not for the fact that the decedent was indeed deceased, his ex-wife would have killed him.

Just a Little Spackle on the Estate Tax

Recent Ruling: Constructive Trust & Life Insurance

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