Another change that is only in effect for 2010 involves income tax basis (value used for calculating capital gains or losses) of inherited assets.  Under prior law, the income tax basis of an inherited asset was generally "stepped up" to its value at the owner's death.  In 2010, however, the deceased owner's income tax basis will generally "carry over" to the heirs.  This means an heir would likely pay capital gains tax when he or she eventually sells the asset.

These changes in the law were created in 2001 by legislation that included a 10-year sunset provision but was intended to lead toward permanent estate tax repeal.  Once the political and economic environment shifted away from permanent repeal we, like most estate planning advisors, expected that Congress would pass legislation to extend the 2009 law and avoid the temporary "repeal" of the estate tax.  Unfortunately, Congress was unable to approve such legislation.  This inaction by Congress has caused great anxiety among planners and clients.  Congress may address transfer taxes this year with a law that applies for the rest of 2010, or even one that applies retroactively back to January 1, 2010.  It is unclear whether Congress will be able to pass such a law and, if so, what the substance of the law would be. 

Notwithstanding these federal changes, the Ohio estate tax continues to apply as in past years.

Why Does This Matter?

The current suspension of the federal estate and GST taxes may cause confusion in many estate plan documents.  Key provisions in many estate plan documents refer to federal transfer tax concepts, such as the "estate tax exemption amount," "GST tax exemption," or "marital deduction."  Because those tax concepts are not in the law this year, there may be questions as to what the documents mean and how property is disposed of, particularly if a person were to die in 2010.

For example, consider a husband's Declaration of Trust that leaves "an amount equal to the maximum amount that will be exempt from federal estate tax" in trust for his children and leaves the balance of his estate to his wife.  Under prior (and future) law, the children's trust would preserve his full estate tax exemption, and the portion for his wife uses the marital deduction for the rest of his estate.  As a result, no federal estate tax would be due at his death.  This is a very traditional form of estate planning for married couples and continues to be generally appropriate.  However, in 2010, when there is no federal estate tax, all of the husband's estate would be exempt from the federal estate tax.  Therefore, all of his property may pass to his children, effectively disinheriting his wife!

Similar problems can arise pertaining to the marital deduction, GST tax exemption, or charitable deduction, depending on how a document is worded.  Formulas that were designed to produce an optimal transfer tax result could cause confusion or mis-allocation of assets if there is no federal estate or GST tax in effect at the person's death.

What Should You Do?

If you are concerned about these issues, you should contact your attorney to review your estate plan. Further, the elimination of the GST tax, coupled with a reduced gift tax rate, may provide a unique opportunity for gifts in trust during 2010, and you may be interested in discussing these options. However, as was mentioned above, there is a possibility that Congress will reinstate the estate and GST taxes this year and make the law retroactive to January 1, 2010.  These variables must be carefully considered before making a substantial gift in 2010.

If you are interested in more detailed information concerning these changes in the law, please visit our website (www.ssrl.com), click on the "Library," and click on the article entitled "2010 Estate Tax Repeal:  How Did We Get Here and What Does It Mean?"

We will, of course, continue to stay on top of the latest developments in this uncertain time.  Please feel free to call us if you have any further questions about the state of the law or how it could impact you.