WASHINGTON – Blanche Christerson, an executive in Deutsche Bank’s private wealth management division, loves her 85-year-old ailing mother, Hedda Lark, of Manhattan Beach, Calif, and isn’t ready for her to die. Still, Christerson says, she and her mother are bothered that in discussing Lark’s estate, they wrestle with tax complications that didn’t exist just a year ago.

Christerson, 54, is responsible for managing her mother’s estate. The wealth adviser says she fears she may be one of about 60,000 Americans whom the congressional Joint Committee on Taxation projects will be caught in a novel tax trap. Those who inherit estates worth more than $1.3 million this year face an expensive quandary caused by the repeal on Jan. 1 of the 94-year-old federal estate tax.

Additional Photos

Blanche Christerson and her mother, Hedda Lark, right, seen here on an excursion to Catalina Island, Calif., 25 years ago, are among the 60,000 Americans wrestling with a tax quagmire caused by complicated changes in the way taxes are levied on estates. Family photo

Under a little-noticed twist, these people will owe capital-gains taxes if they sell assets they inherit. And if their loved ones die in 2011, the levies are scheduled to be even higher. Under 2009 rules, which Congress may reinstate, many of them would have paid nothing.

“It’s really a mess for a lot of people,” says Christerson, who has spent much of this year so far counseling clients facing similar situations. “As heirs, we would have been better off under the old regime.”

Five months into a year that marks one of former President George W. Bush’s biggest tax-policy changes — the end of what he called the “death tax” — confusion reigns.

‘A TOTAL, COMPLETE NIGHTMARE’

Estate planners and their wealthy clients are in purgatory, struggling with whether to spend tens of thousands of dollars to restructure wills, only to have to spend even more if the law is changed again.

Estate planning under ordinary circumstances is expensive and complex. The new environment poses unforeseen risks, such as potential heirs finding themselves unintentionally disinherited if wills aren’t properly rewritten, Christerson says. Others face new tax and accounting complications.

“It’s a total, complete nightmare,” says Carol Harrington, head of the private client practice group at Chicago law firm McDermott Will & Emery. “Clients are frustrated.”

It all happened because nine years ago, lawmakers approved a little-publicized footnote as part of phasing out the estate tax. To hold down the cost to government, Bush’s 2001 tax legislation replaced the estate tax in 2010 with capital-gains levies on inherited items that are sold.

That decision also satisfied Democrats, who argued that large amounts of wealth appreciation would escape tax altogether in the absence of both estate and capital-gains taxes.

The Bush administration crafted the policy not in Congress but in the Treasury Department’s Office of Tax Policy, as part of a broader $1.6 trillion tax cut. The law whittled away the estate tax gradually over nine years, raising the tax-free level of an estate to $3.5 million per person in 2009 from $675,000 in 2001.

It also reduced the tax rate for bequests above those amounts to 45 percent in 2009 from 55 percent in 2001. Unless Congress acts, the estate tax will be resurrected on Jan. 1, 2011, as if Bush’s tax cuts had never happened. The tax rate will be 55 percent on every dollar in excess of $1 million per individual.

For most of the decade since the law was enacted, legislators moved on to other matters.

the time Rep. Earl Pomeroy, D-N.D., sounded a warning about the potential new tax quagmire in late 2009, the Democratic leadership in Congress was so focused on adopting President Obama’s health care overhaul that efforts to avoid the tax mess died.

Pomeroy introduced a bill to keep the estate tax as it was in 2009. It passed in the House but not in the Senate.

“It does reflect the clogging of the channels here,” says Rep. Sander Levin, D-Mich., the acting chairman of the House Ways and Means Committee. He says the stalemate between Democrats and Republicans that bogged down legislators in health care debates for all of 2009 carried over to almost all bills.

CAPITAL-GAINS TAX UNEXPECTED

“With the estate tax, people need to plan,” Levin says. “We need some give and take in the Senate.”

Obama’s proposed 2011 budget poses an ironic challenge for Republicans and Democrats. Obama wants to bring back the estate tax as it existed in 2009.

That would stop the rules from reverting back to 2001 levels and represent a tax cut to 45 percent from the 55 percent it would be if Congress makes no change. And it would increase the tax-free allowance to $3.5 million from the $1 million now slated to take effect in 2011.

As an estate planner, Deutsche Bank’s Christerson knew about the capital-gains tax. She just never expected it to take effect because Congress had repealed a similar tax law in the 1980s after business groups protested the legislation.

A home purchased in the early 1970s for $65,000 is her mother’s biggest asset. It’s now worth about $2.5 million. Had Lark died in 2009, her entire estate would have passed to her heirs tax-free. If Lark dies this year, Christerson and her two siblings could have to pay a 15 percent capital-gains tax if they inherit her home and sell it.

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