Estate Tax Alert and Update for 2010

Estate Tax Alert and Update

Many people have been troubled if not overwhelmed by their losses in the markets as a result of the recent financial crisis and economic downturn.  Individuals and families still may be reeling from the effects of the recession and scurrying to rebalance portfolios; but, regardless of your present net worth, it is still of primary importance to remain focused on how your assets will be transferred to your heirs and other intended beneficiaries and whether your present estate plan, if you have one, should be modified because of current market conditions.

The estate tax has been repealed entirely for one year only in 2010 but returns again in 2011 with a significantly lower exemption of $1 million per individual and a higher tax rate than the 2009 rates.  Your estate plan should take advantage of all the safe harbors created by the tax law to the fullest extent.

Estate Tax Changes

    As of January 1, 2010, there is no federal estate or Generation Skipping Transfer Tax for decedents dying in the year 2010. These taxes were repealed under the Economic Growth and Tax Reconciliation Act of 2001.  Many experts thought that Congress would extend the 2009 rules and rates and allow a $3.5 million dollar exemption per individual and keep the 45% maximum estate and gift tax rate, however, Congress failed to reach a compromise on estate tax legislation by the end of the year thereby allowing the repeal to take place. 

Under the estate tax laws, the full repeal lasts only one year and it ends on December 31, 2010.  As of Jan 1, 2011 the federal estate tax reverts  to the 2001 rates with a significantly lower exemption amount and higher tax rates than what was in effect in 2009.  While many pundits still believe that Congress will act in the coming months and pass estate tax legislation that is retroactive to January 1, 2010 there is no certainty.  In the event that Congress does not act, the estate tax is revived in 2011 and will allow an individual a $1 million exemption amount and apply a maximum tax rate of 55%.  Please note that many states impose a state estate tax, including New York, New Jersey and Connecticut.  

    While the federal estate tax has disappeared for one year as it stands today, the IRS has substituted it with a new capital gains tax regime, which no longer allows for a step up in basis for the property of a decedent.  A step up in basis meant that a decedent’s assets could be valued on the decedent’s date of death rather than on the purchase date for the purpose of capital gains tax.  On the other hand, the IRS has instituted an exemption on the first $1.3 million in capital gains for the estate and allows an additional capital gains exemption of $3 million for a surviving spouse.

What this Could Mean for You

    The repeal of the federal estate tax may impact your existing estate plan and may create a result at your passing that was unintended.  For example, some Wills mandate that trusts be funded on one’s demise and the funding of such trust is calculated by a formula that ties into the federal estate exemption at that time.

    The present uncertainty creates challenges for decedents’ estates, clients and estate planners.  Should you like to discuss your personal planning, I invite you to contact me to discuss your existing estate plan.