The turn of the calendar year always raises questions about estate planning. This year, with the uncertainty surrounding current federal estate tax laws, those questions are even more relevant. Below we've answered several of the most important questions about estate tax at both the federal and state levels, as it stands right now.
Is There Still a Federal Estate Tax in 2010? No. In 2009 the federal estate tax applied to the value of a decedent's estate in excess of $3.5 million at a 45% tax rate. The Economic Growth and Tax Relief Act of 2001 (EGTRA) provided that the federal estate tax would be repealed in 2010 unless Congress affirmatively enacted legislation on or before December 31, 2009, to keep it. Congress failed to act. Therefore, as of January 1, 2010, there is no longer a federal estate tax for 2010.
Is There Still a Federal Generation Skipping Tax in 2010? No. In 2009, in addition to the federal estate tax, there was a separate generation skipping tax (GST tax) imposed on lifetime gifts and transfers at death to grandchildren and more remote descendants in excess of $3.5 million. Again, Congress failed to act. So, as of January 1, 2010, there is no longer a federal GST tax for 2010.
Is There Still a Federal Gift Tax in 2010? Yes. Even though the federal estate and GST tax are gone in 2010, there is still a tax on lifetime gifts. A gift tax is imposed on lifetime gifts that exceed the annual exclusion amount ($13,000 per donee per year) and the lifetime gift exclusion amount ($1 million). However, the 2010 gift tax rate is 35%, down from 45% in 2009.
Is There Still a Minnesota Estate Tax in 2010? Yes. Minnesota has a "look and see" approach to new tax legislation. Changes in the federal tax law are not automatically adopted by the State of Minnesota. Minnesota first reviews the federal tax law changes and then decides whether or not to adopt them.
Because of budgetary concerns, it is unlikely that Minnesota will eliminate its estate tax in 2010. Therefore, even though there is no federal estate or GST tax in 2010, there is still a Minnesota estate tax on decedent's estates exceeding $1 million in value at rates ranging from about 10% to 16% (Minnesota estate tax rates are much higher for the first $1 million, and then graduate from about 10% to 16% after $2 million). Minnesota has no gift tax on lifetime transfers.
Will Congress Bring Back the Federal Estate and GST Tax in 2010? Maybe. Just because Congress failed to timely act to keep the federal estate and GST tax does not mean that Congress will not pass legislation in 2010 to bring these taxes back. Congress may even try to make the tax law retroactive to January 1, 2010. Whether or not they can constitutionally do this is an open question. Many commentators predict that Congress will bring back the federal estate and GST tax similar to its 2009 form, and make the law retroactive to January 1, 2010. However, if Congress does not act in 2010, the estate tax and GST tax will automatically come back on January 1, 2011, but with a lower exemption level of $1 million and an estate and gift tax rate as high as 55%.
How Does This Impact My Estate Plan? Most estate planning documents (e.g., wills and revocable trusts) contain provisions designed to minimize estate and GST taxes. Some of these provisions may need to be reviewed and changed because there is no longer a federal estate or GST tax in 2010.