What you need to know: The Congressional debate on estate tax legislation has been put on pause during its recess, allowing current legislation that repeals the federal estate and generation-skipping transfer taxes to take effect.

What you need to do: Individuals should determine whether these changes will affect their estate planning and stay abreast of the situation in Congress once discussion resumes.

Congress adjourned in 2009 without reaching a compromise on legislation that would have prevented a one-year repeal of the federal estate and generation-skipping transfer taxes. As a result, there is at present no federal estate or GST tax in effect for persons dying in 2010. The federal gift tax remains in effect with a $1,000,000 lifetime exemption, but the rate of tax applicable to gifts over $1,000,000 drops from 45% to 35%.

In addition, property received from persons dying in 2010 will no longer receive an automatic “step-up” in income tax basis to date of death values. Instead, the tax basis will be the lower of the property’s value at the person’s death or the person’s tax basis in the property. There are two exceptions to the new carryover basis rules:

  • The executor of an estate may make an election to increase the basis of any appreciated property of the estate by $1,300,000.
  • When there is a surviving spouse, the executor may allocate an additional $3,000,000 to increase the basis of property transferred to the spouse or a trust for his or her sole benefit.

Under current law, the federal estate tax and GST tax are scheduled to be reinstated on January 1, 2011, with estate and GST exemptions of $1,000,000 and maximum tax rates of 55%. The maximum gift tax rate is also scheduled to increase to 55% in 2011.

Congress is expected to resume debate on new estate tax legislation when it returns from recess in late January, but no one can know for sure what the new legislation, if any, will provide. It is possible that any new legislation passed will be made retroactive to January 1, 2010, although the constitutionality of retroactive change is uncertain.

We will continue to monitor this situation. Changes will be necessary in some clients’ estate planning documents to reflect these developments. Please call or write a member of the Wealth Management Department at Choate if you would like us to review your plan to determine whether any changes are advisable.