Although the federal estate tax expired January 1, 2010, the future of the estate tax remains uncertain. Under current law, the estate tax has been eliminated for 2010, and is scheduled to be reinstated in 2011, but with a lower exemption of $1 million and a higher rate of 55%. In 2009 the exemption was $3.5 million and the rate was 45%.
The January 1 expiration of the estate tax does not guarantee that individuals who pass away in 2010 will not be subject to estate tax. Senate Finance Chairman Max Baucus, D-Montana, and others have voiced their intent to revisit the status of the estate tax in early 2010 and many predict that the tax will be reinstated, retroactive to January 1, 2010. There are questions as to the constitutionality of such retroactive reinstatement, but some precedent to allow for it exists. It is likely that for deaths occurring during this period of estate tax repeal, heirs of large estates will challenge the constitutionality of any retroactive reinstatement.
The expiration of the estate tax also limits the income tax "step-up" in cost basis for assets left to heirs. While the estate tax was in place this basis step-up was unlimited, meaning that heirs selling inherited assets shortly after receiving them would pay little, if any, capital gains tax. Beginning in 2010, this basis step-up is now limited to $1.3 million of assets, with an additional $3 million for the decedent's surviving spouse. Effectively, the estate tax is being replaced with a 15% tax on the capital gain of inherited assets. If the estate tax is reinstated, the unlimited basis step-up would likely be part of that legislation. However, with the current estate tax repeal, the total tax liability for many individuals on inherited assets may be substantially larger than it otherwise would have been had the estate tax not been repealed.
With the uncertainty of the estate tax in future years and even future months, it is important that your estate plan allow for the needed flexibility to address these uncertainties. Reinhart attorneys are available to review your current estate plan and to revise the plan as necessary to create such flexibility.