Q: What was the Federal estate tax law for individuals who died in 2009?
A: In 2009, Federal estate tax law excluded $3.5 million from an individual’s estate for Federal estate tax purposes ($7 million for a married couple). Estates larger than $3.5 million were taxed at 45%.
Q: What will the Federal estate tax law be for individuals who die in 2010?
A: Unless changed by Congressional resolution, there will be no Federal estate tax for estates of individuals dying in 2010.
Q: If there is no Federal estate tax in 2010, will another Federal tax be levied on a decedent’s assets?
A: Under the law as currently written, capital gains taxes may be applied to inherited assets. Under pre-2010 law, the tax basis of inherited property generally was its fair market value at the date of the decedent’s death. As of January 1, 2010, the tax basis of an inherited asset will be the same as its basis was to the decedent (although estates will be allowed to increase the basis of property owned by the decedent by up to $1.3 million, or by up to $3.0 million in the case of property passing to the spouse).
Example: Decedent dies owning an asset valued at $100,000 at his date of death. Decedent’s tax basis in the property is $5,000. The asset is subsequently sold by Decedent’s heirs for $110,000. Under 2009 law, the taxable gain would be $10,000. Under 2010 law (disregarding the $1.3 million in stepped up tax basis available to the decedent’s estate), the taxable gain would be $105,000.
Q: Are the gift tax and generation-skipping tax affected by the law changes taking effect in 2010 under current law?
The exemption from gift tax allows each individual to give up to $1 million in taxable gifts during his lifetime. The gift tax exemption will not change. In 2010, the marginal gift tax rate will decrease from 45% to 35% (the maximum individual income tax rate). In 2009, a decedent could pass up to $3.5 million to his grandchildren or more remote descendants free of generation-skipping tax. In 2010, the generationskipping tax will disappear. The amount a decedent will be able to pass to grandchildren or more remote descendants will be unlimited.
Q: What will happen after 2010 under current law?
A: Under current law, only $1.0 million will be excluded from the estate of a decedent who dies in 2011 ($2 million for a married couple). Estates larger than that will be taxed at 55% (plus a 5% surtax on estates between $10 million and $17.184 million). The generation- skipping tax exemption will return to $1.0 million (indexed for inflation) in 2011.
Q: Will the law be changed for 2010?
A: Democrats have indicated their intention to resurrect the Federal estate tax at its 2009 levels retroactive to January 1, 2010. Republicans will likely seek a higher exemption and lower tax rate. Whatever happens legislatively, the constitutionality of making the tax retroactive will be challenged.
Q: Is the Illinois estate tax law changing for 2010?
A: Yes. In 2009, Illinois estate tax law excluded $2.0 million from an individual’s estate for Illinois estate tax purposes ($4 million for a married couple). Assuming no Federal estate tax in 2010, there will be no Illinois estate tax for Illinois residents who die in 2010.
Q: What else do I need to know?
A: Until Congress resolves these issues, estate planning in 2010 will be uncertain. The members of the Trusts and Estates Group are available to assist you and your clients in understanding the current tax law affecting all areas of estate planning and their potential ramifications.