Estate Tax Considerations

Part of the estate planning process is devoted to minimizing transfer taxes, including state and federal estate tax (applicable to taxable estates of a decedent), gift tax (applicable to certain lifetime transfers), and generation skipping transfer tax (applicable to some transfers that directly skip a generation). The payment of estate taxes may not always be necessary. Tax planning can utilize both lifetime and testamentary options. By employing available deductions, exclusions, exemptions, and credits, the transfer tax applicable to large estates may be reduced substantially and/or deferred until the death of a surviving spouse. However, even if tax planning is not needed, general estate planning should be completed which would include execution of a will.

Effective January 1, 2010, the federal estate tax and generation skipping transfer (GST)ad tax are temporarily “repealed.”  The temporary repeal is the result of changes adopted by congress in the 2001 tax act.  It is anticipated that further changes may be enacted by congress in 2010, possibly even retroactively to January 1, 2010, but until such time the federal estate tax and GST as we have known it will have no application to estate of a decedent dying in 2010.  Each state may have a separate estate or inheritance tax law that will apply even if there is no federal estate tax.  Presently Idaho does not have a separate estate or inheritance tax.  The federal gift tax will continue in 2010 (as discussed more fully below).

Under the current status of the estate tax “repeal,” for an individual dying in 2010, the assets in the estate will be subject to “carryover” basis under complex basis allocation provisions.  Under prior law, the assets in a decedent’s estate received a “step up” in basis to date of death fair market value.  Under the basis carryover provisions in 2010, the fiduciary of the estate will have the authority to allocate up to $1,300,000 to increase the basis of assets in the estate and up to $3,000,000 to increase the basis of assets passing to a surviving spouse or a qualified marital trust.  It will be important for individuals who have tax planning provisions in their testamentary documents to have those clauses reviewed under the current law.  Many of these documents or clauses rely upon or reference provisions of the federal law that are no longer in existence during 2010.  This temporary repeal of the estate tax provisions may cause uncertainty in the interpretation of the estate planning documents for a decedent who dies during the temporary estate tax repeal.  The issue may be resolved through a simple amendment that confirms the intent of the individual or may require more expansive revisions as recommended by your attorney.  In addition, for all testamentary documents, it will be important to consider and address in the testamentary documents the fiduciary authority for allocating the basis carryover for assets in the estate.

In the year 2011, unless congress enacts further changes, the federal estate tax will provide for an “exemption” or credit shelter amount of $1,000,000 per individual, which is significantly reduced from the $3,500,000 that was available in 2009.  In addition, the top rate of 55% will apply to decedent’s estate in 2011 under current law.

The federal gift tax will remain in effect during 2010. Each individual can currently transfer $13,000 per gift recipient each calendar year which is excluded from gift tax. Thus, for a married couple, they can together transfer $26,000 in property value, per recipient, each calendar year. These excluded lifetime transfers are useful to gradually reduce the total value of a gross estate without incurring gift tax consequences. The gift tax exemption for lifetime transfers is presently $1,000,000 per individual. The amount of any lifetime exemption that is utilized through gifts will reduce the total amount of the exemption available at the time of death, if any.

The repeal of the estate and GST taxes has created an opportunity to make larger transfers to children and grandchildren potentially at lower cost.  Any taxable gifts (those in excess of the $1,000,000 lifetime exemption) will be subject to gift tax at the current rate of 35% in 2010.  There would presently be no limit on transfers to grandchildren or trusts for grandchildren or other descendants because as of this writing there is no GST tax (other than standard gift tax as described above).  Although there is no certainty that the gift tax rate will remain at 35% or that congress will not attempt to retroactively impose a GST tax, individuals interested in such transfers should make gifts as early in 2010 as possible to take advantage of the current lower gift tax rate and the repeal of the GST tax.  The donor may desire to make such gifts conditioned or contingent upon the current estate tax repeal and rules remaining in effect as to the particular gift.