At the end of last year the House voted to permanently extend the Federal Estate tax with a $3.5 million exemption per person with a top tax rate of 45% for estates that exceeded that threshold. The baton was passed to the Senate for action, but at year’s end, the Senators had concentrated all of their efforts on the Health Care reform bill and no time was left to address the impending repeal of the Federal Estate tax.
So the Federal Estate tax was repealed of January 1, 2010, but, for only one year.
But it is it gone forever? Probably not for 2010 and definitely not for 2011 when the estate tax is scheduled to come back with a vengeance for estates that exceed the $1,000,000 exemption and a top tax rate of 55%. Congress has expressed a willingness to address the estate tax issue in 2010 and to possibly retroactively impose/resurrect the Federal Estate Tax. What that law will look like is anyone’s guess, and there have been a variety of proposals floated. Most people, however, predict that the Senate with follow the lead of the House and pass a bill, at least in the short term, to go with the $3.5 million exemption per person with a 45% top estate rate, but who knows. Most estate planners could have never imagined that the Congress would have closed out 2009 without passing at least an extension of the estate tax law in 2010. The constitutionality of a retroactive imposition of the estate tax may also be challenged. But Congress has passed retroactive tax legislation in the past and the constitutionality has been upheld.
From our perspective as practitioners, it is important that Congress resolve the estate tax issue, because if they don’t few people realize that the full basis step-up rule to eliminate capital gains taxes on appreciated inherited assets at death also changes for 2010. These new limited basis step-up rules have the potential to wreak havoc on estate plans and beneficiaries who inherit assets that have appreciated well beyond cost basis. Under the new rules for 2010 only, the step-up is limited to $1.3 million for non-spousal beneficiaries and $3 million for assets left to spouse or to special trusts for the benefit of one’s spouse. Compliance with the new basis reporting regime will no doubt be a nightmare for Executors, counsel, and their investment advisors if cost basis information if not readily accessible. Executors will also have to decide, which assets/beneficiaries get this limited basis step-up and which assets do not. Let’s hope Congress acts early in 2010, if not, we may all be in for a bumpy ride.
The Federal gift tax exemption remains at $1,000,000 for 2010 with a tax of 35 percent for gifts which exceed that amount. The per donee exemption for gift taxes remains at $13,000 per donee per year for 2010.
Some estate plans contain a funding formula for the credit shelter trust that pegs solely off of the Federal Estate tax exemption (which theoretically no longer exists in 2010) which could create a problem unless Congress enacts some transitional legislation to correct the glitch. At this point, those plans should be reviewed and possibly amended, if required, into a funding formula that takes into account the 2010 repeal. For our clients who have updated their estate plan with our office since 2003, this amendment may not be required.Share with your network: