NEW YORK -- As estate tax expert Laurence Keiser put it, “There are two things you don’t want to see get made: tax law and sausages.”

But a few weeks into a one-year hiatus for the estate tax, CPAs who make a living assisting clients with wills and wealth transfer are finding they need some help with the complicated recipe book known as the Internal Revenue Code. CPAs in this practice area proved to be hungry for information, as nearly 250 turned out for or tuned in via webcast to the Jan. 26 NYSSCPA Estate Tax Breakfast Briefing to gain a better understanding of how to approach the so-called “death tax.”

Keiser, a member of both the statewide NYSSCPA Estate Planning Committee and its Westchester Chapter counterpart, said he spent the last nine years predicting that this one-year reprieve would never come to pass.

“Surprise, surprise—we woke up Jan. 1 and there was no estate tax,” he said.

It’s important to remember that “improbable” is not “impossible,” Keiser said, and while most people expect to see a piece of legislation adjust the estate tax retroactively to Jan. 1, 2010, there is also the chance that, instead, the tax will reset as scheduled to a higher rate with a lower exemption amount.

“The worst thing that could happen is another patch, an AMT situation,” Tax Notes columnist David Cay Johnston said, referring to the Alternative Minimum Tax, which has to be patched each year through legislation to prevent a large section of the middle class from being drawn unintentionally into its net.

Prior to the 2008 presidential election, the Senate had plans to put a bill in place, which would amend the tax retroactive to Jan. 1, 2010, Keiser noted.

But, “all the efforts to make a deal … haven’t been successful,” added panel moderator Ryan J. Donmoyer, a tax reporter for Bloomberg News.

And in the interim, life—and death—goes on.

Formulas for Disaster

This year, a will or trust could unintentionally disinherit a spouse or child because the language in the document refers to the federal estate tax, which doesn’t currently exist.

“For those of us who draft wills, [there] are some major problems lurking,” Keiser said.

Many wills are drafted using formulas to distribute assets, Keiser said. For example, an individual may want to split assets between a surviving spouse and a child. That individual may specify in a will that the total of assets not subject to the estate tax be passed along to the child, with the balance going to the surviving spouse.

If that hypothetical person were to die this year, the entire amount of the decedent’s assets can be passed along with no estate tax impact. Using the formula, the child would get everything and the surviving spouse nothing—which may not be in accordance with the person’s wishes.

“A lot of wills are formula wills,” noted Bernard N. Rappaport, a member and former chair of the NYSSCPA’s Estate Planning Committee.

What does this mean for a CPA in estate planning? Potentially, it means the creation of thousands of amendments—or codicils—to fix thousands of wills.

“It’s one set of rules for 2009, another set of rules for 2010, and probably another set of rules for 2011,” Rapppaport said. “It creates a lot of confusion.”

Another potential issue involves pensions, which are taxed twice at death. Some wealthy individuals, Rappaport said, may opt to leave their pensions to charity to avoid the double taxation. But if they die this year, that pension would only be taxed once, as income. He said it’s important to check with clients to see if they would still want to be as generous if the tax impact were reduced.

He urged caution in amending wills and estate planning documents. “You have to be careful about how you draft it,” he said.

The one-year estate tax hiatus also brought with it a change in basis, Keiser noted. Historically, inherited assets are often stepped-up in basis, meaning that they are valued at the amount they are worth when the decedent dies, not the amount they were on the date they were purchased.

“The major thing eliminated with the estate tax was the step-up in basis at death,” Keiser said, in favor of carryover basis.

Come Jan. 1, 2011, “all bets are off,” he said. “Just what happens in all this is anybody’s guess.”

Keiser recommended a few trusty estate planning vehicles. He lauded the use of Qualified Terminable Interest Property (QTIP) trusts—what he considers “the heart of estate planning,” and Grantor Retained Annuity Trusts, or GRATs, in which the grantor creates an irrevocable trust and retains the right to receive, for a specified term, an annuity based on specified sum or fixed percentage of the value of the assets transferred to the trust.

Keiser said the number of issues stemming from this estate tax episode reveals “some very interesting political questions” and shows, again, the trouble with having such a complex tax code.

Johnston—who won the Pulitzer Prize in 2001 for exposes of tax inequities—agreed, and spoke to the need for significant reform of the tax system.

Keiser said that while most people expect to see a piece of legislation adjust the estate tax retroactively to Jan. 1, 2010, there is also the chance that, instead, the tax will reset as scheduled to a higher rate with a lower exemption amount.