THIS COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE
USED, AND IT CANNOT BE USED, FOR THE PURPOSE OF AVOIDING PENALTIES THAT MAY BE
IMPOSED UNDER ANY TAX LAWS.
As of
January 1, 2010, the Federal estate tax has been repealed -- but only for a
period of 12 months.
As part
of the 2001 tax act, Congress increased the amount persons could give away
tax-free at death (the "Exemption Amount"), with the increases phased
in over a ten year period. The Exemption
Amount increased over the years, reaching $3,500,000 in 2009 and ultimately
became unlimited this year. In other
words, the Exemption Amount in 2010 is equal to the value of your entire
estate. However, because the votes of 60
Senators could not be obtained back in 2001, the tax law changes were limited
to a duration of 10 years, meaning that next year, the estate tax is scheduled
to return with an exemption of only $1,000,000 per person and a rate of tax as
high as 55%. Certain larger estates will
be subject to an extra 5% surtax that was repealed altogether in 2001, but
which may also be reinstated in 2011.
There
are other changes that have taken place for the 2010 tax year. First, under the new laws, the cost basis of
property acquired from a decedent will be the lesser of the decedent's basis or
the property's fair market value on the decedent's date of death. In the past, inherited property benefited
from a stepped-up cost basis. These new
carryover basis rules will cause the imposition of capital gains taxes that
previously were avoided following a person's death. There are two important exceptions, though,
to the carryover basis rules. $1,300,000
of basis step-up can be allocated to any assets owned by a decedent, and an
additional $3,000,000 of basis increase can be allocated to properties passing
to a spouse or to a special type of trust created for a spouse.
Second,
the Federal gift tax, while not repealed, now has a lower 35% rate of tax, down
from 45% in 2009. Under current law,
each person may give away during lifetime as much as [$1,000,000 (lifetime gift
limit)] in cash or other property without generating any gift taxes. Any gifts which exceed this amount will be
taxed at 35%. However, the gift tax will
not apply to most of the gifts people make because each person can give
[$13,000] each year to any other person, without reducing the [$1,000,000
(lifetime gift limit)] gift tax exemption.
This [$13,000]/year exclusion from the gift tax is known as the
"Annual Exclusion." (For many years,
the Annual Exclusion was limited to $10,000, and it is still commonly referred
to as the "$10,000 annual exclusion.") You will use part of your [$1,000,000
(lifetime gift limit)] gift tax exemption if your gifts exceed the annual
exclusion.
Third,
the Federal generation skipping transfer tax has been repealed as well for the
2010 tax year. Under the old law which
existed prior to repeal, each person could give away during lifetime or at
death up to [$3,500,000 (GST exemption)] (the "GST exemption")
without imposition of the generation skipping transfer tax. Any gifts to grandchildren or
great-grandchildren (and to certain other persons two or more generations
younger than the person making the gift) in excess of the GST exemption would
have been subject to the GST tax which was equal to the highest marginal estate
tax bracket (45% in 2009). Although the
GST tax has been eliminated for 2010, it will be reinstated in 2011, and the
available GST exemption will be reduced to its former level of only $1,000,000
(although this amount will be indexed for inflation) and with a 55% rate of
tax.
No one
knows what will happen to the estate, gift and generation skipping tax laws
during 2010. Congress may cancel the
repeal of these taxes and make them apply retroactively back to January 1, 2010
- even for people who died when the tax was zero. In fact, it was widely believed that Congress
would have already done so by now, but they still have not acted. Congress may also do nothing and let the laws
come back on their own in 2011. Or
Congress may enact all new estate and GST tax laws.
The
decision you need to make now is whether you should meet with me or another
estate planning attorney to have your estate planning documents revised to
address estate and GST tax repeal. It is
possible that your documents were written in such a way that with repeal, your
property will be passing in a manner that you never intended. It is also possible that the formulas used in
your documents will be vague or meaningless due to the fact that they were
written based upon Internal Revenue Code sections that have been repealed, and
upon taxes, exemptions and deductions that no longer exist.
Essentially,
you need to decide if the cost, both in time and money, to obtain revised
estate planning documents is worth the benefit.
If you are still alive on January 1, 2011 -- or sooner if Congress
retroactively reinstates the estate and GST tax or enacts new tax laws -- then
the cost will most definitely not have been worth it. Depending on the changes that are required,
you might end up paying for the newest and best language, and then a few days
later, Congress might decide to bring back the estate tax. Or, you might make it to 2011 (hopefully!)
when the laws revert to how they used to be, and the legal fees you will have
spent and the time you will have devoted will all be for naught. Nonetheless, the safest approach is to have
your documents reviewed and modified, if necessary.