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No Senate Republican was willing to extend the current $3.5 million applicable exclusion amount past Dec. 31, so the original Economic Growth and Tax Relief Act of 2001 (EGTRRA) repeal of the federal estate and generation-skipping tax (GST) provisions took effect on Jan. 1 for a period of 12 months. Repeal will not affect most decedents’ estates, but contrary to popular understanding, it will not be good news for all heirs.

Effective Jan. 1, Iowa is looking at approximately 50 new estates per month that will be negatively affected by institution of modified carryover basis – the lower of fair market value or decedent’s adjusted basis. These estates would not have been subject to federal estate tax, but the loss of a full markup to market at death will create new income tax exposure when inherited assets are sold.

The estate and GST repeal should benefit about four new Iowa decedents’ estates per month by avoiding payment of federal estate and/or GST tax. These estates will, however, be subject to the new modified carryover basis rules that were part of EGTRRA, adopted in 2001. Basis is the cost of an asset plus or minus any adjustments permitted by the tax code. Carryover basis means that all individuals will need to keep cost and tax information on all assets going to heirs. Those records will need to be maintained through generations until the asset in question is sold.

Passing a federal estate tax in 2010 and making it retroactive to Jan. 1 is a dead duck, in my opinion, but remains a possibility on the carryover basis issue. I believe that retroactive application of the tax would be unconstitutional in violation of the due process clause of the Fifth Amendment.

Remember also that it will take the vote of 60 U.S. senators to keep the applicable exclusion amount from becoming $1 million on Jan. 1, 2011. Rejecting the offer of a permanent $3.5 million inflation-indexed applicable exclusion amount may turn out to be a terrible tactical decision that could have a devastating impact on many Iowa families.

Family estates in the $2 million to $7 million range are now in jeopardy as a result of the decision to put all the chips behind those with estates in excess of $7 million. We’ll see how ignoring the traditional rule of “a bird in the hand is worth two in the bush” plays out next year. Perhaps the senators in question concluded that holding the $2 million to $7 million estates hostage to a death tax was a political necessity to keep the flame alive for mega estates.

If Republican senators lose this bet made with other people’s money, they could reap a whirlwind of retribution from those who would lose billions and billions to Washington. At least the next few months will render a verdict on the validity of gossip over rampant tales about well-heeled grandmas and grandpas being kept on life support until 2010.

Michel Nelson is a senior vice president at Iowa Savings Bank in Carroll.