Estate Tax In Flux


We are currently living in an estate tax environment that no practitioner anticipated. Following is an update of the current situation and some key action steps for you to consider.

Background
In 2001, Congress passed The Economic Growth and Tax Relief Reconciliation Act. Part of the Act was a one-year repeal of the Estate and Generation Skipping Transfer Taxes in 2010. The legislation also contained a “sunset” provision such that on January 1, 2011 the estate tax comes back into law as it was in 2001.

For the 10 years since, congress has debated changes to this law. It was virtually a forgone conclusion among practitioners that some type of legislation, either in the form of a one-year patch or something more permanent, would be forthcoming before the end of 2009 to avoid the one-year elimination of the estate tax. Clearly, this was not the case.

The Situation Today
The federal estate tax is repealed for one year in 2010, or until Congress passes legislation to the contrary. Any new legislation could be retroactive to the beginning of the year, but there is disagreement as to the constitutionality of such a move. If there is no change, the estate tax comes back in 2011 with only $1 million exemption per individual and tax rates as high as 55%.

The gift tax exemption amount remains unchanged at $1 million allowed to be transferred during one’s life before incurring the tax. The highest tax rate in 2010 is 35%, but goes up to 55% in 2011.

The generation skipping tax (GST) is also repealed for one year in 2010, and also comes back in 2011.

Two important items to note:

• Under the old law, all property owned at death received a “step up” in cost basis to the value on the date of death. Because there is no estate tax, the property of the decedent will not receive a step up. However, the executor of the estate will be able to increase the basis of assets up to $1.3 million for assets passing to anyone other than the surviving spouse and $3 million for assets passing to the surviving spouse.
  
  

• Many wills, trusts and other agreements contain wording to direct the funding of estate trusts or the ownership of assets. If the language references either a federal estate tax or the federal exclusion amount, with the estate tax repealed, there is the potential for a surviving spouse or other beneficiaries to receive much less than the original intention—and possibly nothing.

Action Items
We believe it is imperative to call or schedule a meeting with your attorney to review any estate planning or trust documents to see if the elimination of the federal estate and GST tax would have an effect on any “who” and “how much” issues. Obviously, the immediacy of this step is dependant on your own personal situation, but it recommended for everyone, regardless of age or health.

If you are inclined to make lifetime gifts to your children or grandchildren in excess of the annual exclusion ($13,000 per donee), please meet with your legal and tax advisors right away to discuss pros and cons of doing so in light of any subsequent Congressional action this year.

Likelihood of Legislation in 2010
Many practitioners feel it would be unpopular to allow the current law’s 2011 provisions ($1,000,000 exemption, 55% estate and gift tax rates) to become reality. However, the very same reasons that prevented legislation from emerging last year still exist this year. In addition, 2010 is an election year and this is not an issue thought to win votes. If there is no legislation by springtime, it may not be addressed again until mid-November which may not leave enough time for action before the end of the year.

We will continue to provide updates as the year progresses. In the meantime, if you would like to discuss your particular situation, please contact a member of your service team or Alane Boffa at aboffa@cohencpa.com.