Federal Estate Tax is Repealed for One Year (Possibly)
Many of us have grown up believing that nothing is certain except for death and taxes. Now, because of the actions, or more particularly, the inactions of Congress, we cannot even be certain about that.
In 2001, Congress passed a ten-year tax law change that phased in increased estate tax exemptions and reduced estate tax rates, culminating in 2010 with a one-year repeal of the federal estate tax, to be reinstated in 2011 at the old 2001 rates. Most estate planning professionals expected Congress to act within the ten-year period to make the changes permanent, in one form or another. However, Congress did not act prior to December 31, 2009, and we now find ourselves in the midst of a period of great uncertainty, which has created much angst among individuals and professionals alike.
For 2010, the federal estate tax is now repealed. At first blush, this sounds like a good thing. However, the result is turmoil, with possibly higher taxes next year. In addition, there is the possibility that Congress will impose a federal estate tax retroactively to January 1, 2010, which creates additional turmoil and uncertainty.
What are the changes?
Repeal of the federal estate tax for 2010 only.
Repeal of the generation skipping transfer tax for 2010 only.
Retention of the federal gift tax with the same $1,000,000 lifetime exclusion, but with a lower flat gift tax rate of 35%, for 2010 only.
Change from "step up in basis" to "carry-over basis" for capital gains tax on inherited assets, with a limited basis increase.
Sunset of the repeal in 2011, with a reversion back to the old federal estate tax rules that were in effect in 2001 (a $1,000,000 exemption amount and tax rates of up to 55% or 60%).
What is the good news?
As of right now, for one year only, there will be no federal estate tax for individuals who die in 2010.
A lower gift tax rate of 35% (for gifts in excess of $1,000,000).
No generation skipping transfer tax (which previously was at a flat rate of 45%).
What is the bad news?
- The administrative burden of carry-over basis is extremely difficult and likely unworkable.
- Many more people will be affected by the capital gains tax associated with carry-over basis than would have been by estate tax, resulting in overall higher taxes for most people.
- Because Massachusetts still has an estate tax, there will still be a step up in basis for Massachusetts income tax purposes. Two sets of records will need to be kept.
- It is possible Congress will attempt to reinstate the federal estate tax in 2010 on a retroactive basis to January 1st, which may or may not be constitutional, likely resulting in litigation.
- There is uncertainty regarding allocation of the generation skipping transfer tax exemption to generation skipping trusts during and after 2010, due to the one-year repeal of the generation skipping transfer tax.
What you should or should not do:
- Review your current estate plan and estate planning documents to be sure there are no unintended results or ambiguities due to this change in the tax laws.
- Do not believe that the federal estate tax or the generation skipping transfer tax is gone for good.
- Do not abandon your current gifting plans for family and charities.
- Do not give up on estate planning, which is still needed to plan for family needs, asset protection, beneficiaries of retirement plans and disposition of the family business, among other things.
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