No Solution on Estate Tax

No Estate Tax Certainty (Yet)

Last minute Congressional efforts to extend the federal estate tax into 2010 were side-lined by the focus on health care reform. Consequently, the estate tax has been repealed effective January 1, 2010.

What are the new rules?

The law now provides that there is no federal estate tax for those who die this year. Instead, complicated carry-over basis rules apply for property inherited in 2010. Also, there currently is no federal generation skipping transfer tax. The gift tax remains, however, along with the $1,000,000 lifetime gift tax exemption and $13,000 annual exclusion. The gift tax rate has dropped to 35 percent.

Lawmakers say they will address the estate tax later this year, and a variety of proposals have been discussed. If a new estate tax law is passed in 2010, some senators and representatives have expressed an intention to make its application retroactive to January 1, 2010.

If lawmakers do not pass new estate tax legislation in 2010, then the estate tax would reappear for persons dying in 2011 and later, with a $1,000,000 exemption.

	ESTATE TAX
2009	2010	2011
$3,500,000 federal estate tax exemption	No federal estate tax	$1,000,000 federal estate tax exemption

Step-up in basis on all assets included in decedent's estate	$1,300,000 of basis step-up available for all decedents, plus $3,000,000 of basis step-up for assets passing to a surviving spouse	Step-up in basis on all assets included in decedent's estate

The generation skipping transfer tax would come back, too, along with a projected $1,100,000 exemption.

	GENERATION SKIPPING TRANSFER TAX
2009	2010	2011
$3,500,000 federal generation skipping transfer tax exemption	No federal generation skipping transfer tax	$1,100,000 (projected) federal generation skipping transfer tax exemption

The gift tax would remain in place through 2010, and it too would be subject to a $1,000,000 exemption.

	GIFT TAX
2009	2010	2011
$1,000,000 federal gift tax exemption	$1,000,000 federal gift tax exemption	$1,000,000 federal gift tax exemption
Exclusion from gift tax for gifts of $13,000 per year / per donor / per donee	Exclusion from gift tax for gifts of $13,000 per year / per donor / per donee	Exclusion from gift tax for gifts of $13,000 (projected) per year / per donor / per donee

The top marginal estate, gift, and generation skipping tax rate would be 55 percent.

	TAX RATES
2009	2010	2011
45 percent top marginal tax rate for gift, estate, and generation skipping transfer taxes	35 percent top marginal tax rate on lifetime taxable gifts	55 percent top marginal tax rate for gift, estate, and generation skipping transfer taxes

Keep in mind that these rules for 2010 and 2011 could well change if Congress does, in fact, pass a new tax law this year.

Is there anything to do about 2009?

If you made taxable gifts in 2009 be sure to report them on a gift tax return, due on April 15, 2010. If you made large reportable gifts to your grandchildren in 2009 or earlier and have not yet allocated generation skipping transfer tax exemption to them, you should consider making that allocation when you file your 2009 gift tax return.

What to do in 2010?

Since the generation skipping transfer tax is not in effect now, you might choose to make additional gifts to grandchildren and great-grandchildren in 2010. But in doing so you could risk triggering a now uncertain tax if Congress enacts a new generation skipping transfer tax in 2010 and makes it retroactive to January 1.

Also, 2010 might be a good year to make gifts that would result in the payment of gift tax, because the tax rate is lower (35 percent) than it was in 2009 (45 percent), and lower than it is scheduled to be in 2011 (55 percent)... subject to possible retroactive application of a new tax law.

You also should consider updating your personal financial statement to include a record of your tax basis in each asset. This information might become important if carry-over basis stays in effect for 2010 or beyond.

What about my estate planning documents?

Many estate plans include provisions that were used to minimize federal estate and generation skipping taxes. If individuals with such provisions die this year, it may be difficult to implement some of those provisions during this period, when the estate and generation skipping taxes are temporarily not applicable. And in some cases, if a person dies during this period of tax repeal, her or his plan could result in serious unintended consequences, such as the disinheritance of beneficiaries whose bequests were dependent on a tax structure that now has been repealed. Prudence dictates that those estate plans be updated to take into account that there is no estate tax currently in effect.

As uncertain as the estate tax is now, it is a useful reminder that it is essential that estate plans be kept up-to-date. We will continue to monitor this situation; and in the meantime, if you have questions about the tax situation or its application to your specific plan, please call Gordon Wishard, Richard Johnson, Gina Giacone, Kristine Bouaichi, Kevin Alerding and Andrew Vento.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.

CIRCULAR 230 DISCLOSURE: To ensure compliance with recently-enacted U.S. Treasury Department Regulations, we are now required to advise you that, unless otherwise expressly indicated, any federal tax advice contained in this communication is not intended or written by us to be used, and cannot be used, by anyone for the purpose of avoiding federal tax penalties that may be imposed by the federal government or for promoting, marketing or recommending to another party any tax-related matters addressed herein.