This Alert is to advise you of changes in the federal tax laws that may have an effect on your current estate plan. Although it was widely anticipated that Congress would act before December 31, 2009, to avoid the repeal of the federal estate and generation-skipping ("GST") taxes scheduled for the year 2010, it did not do so. As a result, under current law, (i) no federal estate or GST taxes will be imposed on estates of individuals who die in 2010 and (ii) the federal estate and GST taxes will be reinstated in 2011, with a $1 million exemption (adjusted for inflation, in the case of the GST tax) and a maximum federal tax rate of 55%. The federal gift tax law remains unchanged. Each individual will continue to have a $1 million lifetime federal gift tax exemption with a maximum federal gift tax rate that is currently 35%. Absent Congressional action, the maximum gift tax rate will increase to 55% on January 1, 2011. Although Congress was unable to pass legislation in 2009, it will likely act to reinstate the estate and GST taxes and may attempt to make these taxes retroactive to January 1, 2010. It is not known, however, if Congress has the power to impose these taxes retroactively, or whether Congress will reinstate the tax at the 2009 rates or at different rates.
The typical estate plan of married couples seeking to minimize federal estate taxes upon the death of the first spouse to die takes advantage of the federal estate tax exemption (and often the exemption from GST tax) by means of a formula, with the balance of the estate passing to the surviving spouse in a form that qualifies for the marital deduction. Since there will be no federal estate tax in 2010 (and, accordingly, no exemption from such tax), it is unclear how Will provisions using formulae that refer to these exemptions will be interpreted by courts. Furthermore, Wills that create marital trusts in New York, New Jersey, Connecticut and other states that impose a separate state estate tax may need to be revised in order to deal with certain state tax issues.
Another major change in the tax law taking effect this year relates to the capital gains tax on inherited property. Prior to January 1, 2010, the income tax basis of an inherited asset was “stepped up” to its fair market value on the date of the decedent's death. For 2010, the step-up in basis rule has been eliminated and the tax basis of bequeathed property will be the decedent's basis in the property (so-called "carryover basis"). Therefore, if an individual dies in 2010 and his or her property is later sold, a capital gains tax will be assessed on the difference between the value of the property on the date of sale and the carryover basis in the property. Accordingly, the beneficiaries of such an estate will need to retain records going back many years in order to establish the historic cost basis of the estate's assets. Estates of individuals dying in 2010 will be entitled to a basis step-up of $1.3 million for any assets passing to anyone, and an additional basis step-up of $3 million for qualifying bequests to a spouse. On January 1, 2011, the capital gains step-up rules will revert to the pre-2010 regime.
Given these many recent changes in the tax law, you may wish to call or meet with us to discuss the new rules, to ensure that your estate planning documents still accurately reflect your intentions.