Due to Congressional inaction in the final weeks of 2009, the estate tax and the generation-skipping transfer tax have been repealed for individuals dying during 2010 and for generation-skipping transfers made in 2010. The gift tax remains in effect in 2010.
Because of this surprising failure by Congress to address the estate tax situation, and prevent the repeal as most had expected, we believe it is appropriate to determine whether your estate plan should be revised. Under the Internal Revenue Code, as of January 1, 2011, the estate tax and generation-skipping transfer tax will be reinstated at the 2001 exemption amounts and rates (a $1,000,000 exemption from federal estate tax and a top tax rate of 55%). Because of Congressional inaction, the $3,500,000 estate tax exemption has disappeared. Congress may well take action in 2010 to change the current law, possibly retroactive to January 1, 2010. However, it is not possible to predict the conduct of Congress and whether any legislation will be passed prior to January 1, 2011.
As a result of this one-year repeal of the federal estate tax and generation-skipping transfer tax (unless retroactively restored by Congress), it may be uncertain how particular provisions of your estate planning documents will be interpreted if your death occurs in 2010 while there is no estate tax or generation-skipping transfer tax in effect. Certain tax concepts do not apply this year, and there may be some question as to how your property is to be disposed of under your documents. That in turn may cause tax questions to arise.
Another change that became effective this year relates to the income tax basis of inherited assets. Income tax basis is the value from which gain or loss on assets sold is measured. Until January 1, 2010, the income tax basis of an asset was adjusted to its value as of the date of the owner’s death. As of January 1, 2010, this automatic “step-up” in basis will no longer occur. Rather, as a result of Congressional inaction, the deceased owner’s income tax basis in assets will “carry over” to the persons who inherit the assets, although certain exemptions are available under the law to minimize the potential gain on inherited assets. It may, therefore, be appropriate to revise your documents to take into account the possibility that these new basis rules will apply to your estate.
Please note that although the estate tax and generation skipping transfer tax have been repealed, the federal gift tax remains in place in 2010 with a $1,000,000 lifetime exemption. However, the gift tax rate has been decreased to 35%, instead of 45% as in 2009. The $13,000 annual per-donee gift tax exclusion is still available for certain gifts in 2010.