2010 REPEAL OF THE FEDERAL ESTATE TAX

Effective January 1, 2010, the federal estate tax and generation skipping transfer (GST) tax are repealed for the year 2010 unless congress enacts further changes.  If no further changes are adopted, the federal estate and GST tax will return on January 1, 2011, with a $1,000,000 estate tax exemption (which is significantly reduced from the $3,500,000 exemption that was in effect in 2009).  It is unknown if congress will attempt to adopt retroactive changes to the estate tax or if retroactive estate tax imposition would be found to be unconstitutional.   Each state may continue to have a separate estate or inheritance tax, although Idaho has not adopted such laws.

The federal gift tax will continue in 2010 with a $1,000,000 lifetime exemption and the $13,000 per person annual exclusion.  However, taxable gifts in 2010 will be subject to a maximum top rate of 35% gift tax rather than the 55% rate that will apply in 2011 if there are no legislative changes.  For estates of individuals dying in 2010, the assets in the estate will be subject to carryover basis under complex basis allocation provisions (rather than receiving a “step up” in basis to date of death fair market value). In 2010, the fiduciary can allocate up to $1,300,000 to increase the basis of assets and the fiduciary can allocate up to $3,000,000 to increase the basis of assets passing to a surviving spouse or a QTIP trust. 

As a result of the repeal of the estate tax and the basis carryover, if your planning documents incorporate any estate tax planning provisions such as a bypass trust, generation skipping transfers or disclaimer trusts, I strongly recommend you have these provisions reviewed to ensure your intent is protected and that the plan is appropriate based upon the present circumstances. Many of these tax planning clauses in existing documents are tied to provisions of federal law that may not exist or that may have no effect if a death occurs in 2010.  By incorporating these tax planning concepts into the estate documents, concern exists that litigation will be required to judicially construe the provisions of a will or trust if no estate tax exists on death and yet the document relies upon these concepts for distribution of the estate.  It is also important that provision be made in your documents for basis allocation under the present state of the law.

Finally, the repeal of the estate and GST taxes has created an opportunity to make larger transfers to children and grandchildren at potentially lower cost.  Any gifts will remain subject to the lifetime gifting exemption of $1,000,000 or the $13,000 annual exclusion.  However, any taxable gifts will be subject to gift tax at the current rate of 35%.  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 the regular gift tax noted above).  It is also possible that legislative changes or regulations may be adopted that significantly restrict the use of valuation discounts, such as may be applicable to limited partnership interests.  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, if you are interested in such transfers it is recommended the gifts be made as early in 2010 as possible to take advantage of the current lower gift tax rate, the repeal of the GST tax and the potential valuation discounts.