Most tax advisors believed Congress would extend the estate tax prior to Dec. 31, 2009. The House took action, but the Senate did not. Therefore, pursuant to the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the federal estate tax and generation skipping transfer (GST) taxes were repealed as of Jan. 1, 2010.
Unless Congress acts under the 2001 law, the federal estate tax and the GST taxes will return on Jan. 1, 2011, with a top rate of 55 percent and an exemption equivalent of $1 million, compared to a 45 percent top rate and a $3.5 million exemption equivalent as of Dec. 31, 2009.
The repeal effective January 1, 2010 has the following impact:
- In 2010, the tax bases of assets acquired will have the same income bases as the decedent. There is an exception whereby an executor may allocate
up to $1.3 million to adjust asset bases, but not above the fair market value at the date of death. Also, the executor may adjust assets received
by the spouse up to $3 mil-lion. Heirs are required to pay capital gains taxes in excess of the first $1.3 million on any appreciated property when it is sold. Therefore, heirs must be prepared to locate investment account statements possibly decades old to calculate gain on today’s value from the original price. Unless the decedent has excellent records, this could require a lot of work for their heirs.
- The gift tax rate is 35 percent for taxable gifts. Also, no GST tax is assessed during 2010. This may lead to some planning alternatives, including the use of family limited partner-ships, and using discounting for lack of marketability and lack of control or minority interest to reduce value. The funding of dynasty trusts and the use of personal residence trusts should also be considered. These certain types of transfers must be carefully planned or structured, especially in this tax environment.
It is not clear whether or not Congress will change the law in 2010. Many advisors still expect Congress to change the law some time. This year, bringing back the 45 percent rate, and at least a $3.5 million exemption equivalent. It is also unclear if the law would be retroactive to apply back to Jan. 1, 2010. Some advisors believe
a retroactive change back to Jan. 1, 2010, will result in a Supreme Court challenge because Congress would be retroactively imposing a tax that no longer exists. These uncertainties add a measure of challenge to tax planning this year.
Because no federal estate law exists, there is a major concern or issue with clients whose wills, trusts or documents make reference to possibly now obsolete Internal Revenue Code sections. The so-called “Formula Estate Plan,” which allocates minimum or maximum amounts to surviving spouses, various trusts or other heirs for their benefit may result in an estate being distorted. Clients would be well advised to review their estate plans to determine if any potential difficulties exist and if their plans accurately reflect the respective spouse’s intentions.
Unless Congress takes action prior to Jan. 1, 2011, the Internal Revenue Code provisions prior to EGTRRA will again be in effect for 2011 and subsequent years. As a result, the estate tax, GST tax and gift tax rates will have a graduated rate as high as 55 percent and an applicable exemption equivalent of only $1 million. Also, an addition-al 5 percent tax on estates more than $10 million will be applicable. However, the offsetting state inheritance or death tax credit will again be part of the IRC.
In summary, the old adage still holds true that death and taxes are the only certainties in life. However, for 2010, even the estate, GST and gift taxes hold an element of uncertainty.
For more information, contact us at Email or 215.441.4600.