At the time this bulletin is being delivered to you, the federal estate tax and generation skipping transfer tax laws have been temporarily repealed. These changes resulted from the inability of Congress to agree to extend the transfer tax laws that were in effect in 2009 or to enact a different set of transfer tax laws. Senate Finance Committee Chairman Max Baucus has stated that there is “massive, massive confusion” as a result of the failure of Congress to act. A number of members of Congress have stated their intent to enact new transfer tax laws in 2010 and to make those laws retroactive to January 1, 2010. However, it is not clear whether the members of Congress will be able to reach agreement on new transfer tax laws since they have already tried to do so and failed. It is also likely that any law that purports to be retroactive will be challenged in court as being unconstitutional.
For 2010, the following laws are in effect (but may be subject to retroactive change):
- Estate Tax - The federal estate tax is repealed.
- Generation Skipping Transfer Tax - The federal generation skipping transfer tax is repealed.
- Gift Tax - The federal gift tax is still in force, but the top marginal rate is 35% rather than 45%; the lifetime gift tax exclusion remains at $1,000,000.
- Basis – For federal income tax purposes a carry-over basis regime has replaced the “stepped-up” basis rules for property acquired from a decedent. This means that a beneficiary who inherits assets from a decedent will have a basis in appreciated assets that is equal to the decedent’s basis in those assets (rather than the fair market value of the assets on the decedent’s date of death). Stated another way, a “step-up” in basis is no longer allowed. However, each estate is allowed a basis adjustment of $1,300,000 and a basis adjustment of $3,000,000 for qualifying transfers to a spouse.
Beginning in 2011, the following laws will be in effect (if Congress does not make any changes):
- Estate tax - The federal estate tax will be reinstated with a maximum rate of 55% plus an additional 5% surcharge on estates between $10,000,000 and $17,184,000 (compared to the maximum rate of 45% in 2009). The estate tax exemption is reduced to $1,000,000 (rather than the $3,500,000 exemption allowed in 2009).
- Generation Skipping Transfer Tax - The federal generation skipping transfer tax is reinstated at a flat rate of 55%. The GSTT exemption is reduced to an inflation-adjusted $1,000,000 (which will be approximately $1,300,000) (rather than the $3,500,000 exemption allowed in 2009).
- Gift Tax – The maximum federal gift tax rate will increase to 55%.
- Basis – The carry-over basis regime will be repealed. A beneficiary who inherits assets from a decedent will have an income tax basis equal to the fair market value of the asset on the decedent’s date of death (which was the law in 2009 and prior years).
What Should You Do?
Many clients’ estate plans contain tax-based formula clauses. These formulas are premised on the existence of the federal estate tax. The temporary repeal of the estate tax may alter a fundamental premise of a client’s estate plan. Unfortunately, we cannot predict whether Congress will act or, if it does act, what it will do. In the event of the death of an individual during the time period in which the transfer taxes are repealed, it is possible that the existing tax-based provisions in the individual’s estate plan will not accomplish his or her objectives. Accordingly, some clients may wish to amend their estate planning documents during the period of temporary transfer tax repeal.