United States: Temporary Repeal Of Federal Estate Tax And Generation-Skipping Transfer Tax May Affect Your Estate Plan

As of January 1, 2010, the federal estate tax and generation-skipping transfer (GST) tax were repealed. Under current law, the repeal is scheduled to be in effect for all of 2010, although Congress may reenact the estate and GST taxes (possibly retroactive to January 1, 2010) at some time during the year. This alert provides a basic summary of the current estate, GST, and gift tax laws and a general overview of certain estate planning opportunities that the temporary repeal may present. Existing estate plans that use formulas related to the estate or GST tax may be affected by these significant tax law developments.

Current Law

Because Congress unexpectedly failed to take any action during 2009, as of January 1, 2010, there is no federal estate tax or GST tax. Under current law, this repeal of the estate and GST taxes is in effect for 2010 only. Also, note that although there currently is no federal estate tax, a number of states still impose a state estate tax (California, Florida, and Wisconsin are among the states that have no such tax).

The federal gift tax remains in effect, although the top federal gift tax rate is 35 percent in 2010 (down from 45 percent in 2009), and the lifetime gift tax exemption amount stays at $1 million. The annual gift tax exclusion amount for 2010 is unchanged from 2009 at $13,000 per individual (or $26,000 for a consenting married couple). Gifts of the annual exclusion amount continue to be a simple and effective way to reduce your estate.

There also are new income tax basis rules in effect for 2010 that may eliminate the "step up" in basis to date of death values previously applicable to one's assets at death. The new rules institute a "modified carryover" basis system, under which the basis of each asset acquired from a decedent is the lesser of the decedent's tax basis or the fair market value of the asset on the decedent's date of death. The executor may increase the bases of assets acquired from a decedent by up to $1.3 million and by an additional $3 million for assets passing outright to a surviving spouse or to a qualified trust for the spouse's benefit. Given these new rules, it is recommended that clients keep all records of basis information for their assets.

Several congressional leaders have said they will try to reinstate the estate and GST taxes at some point during 2010 (and perhaps attempt to make the taxes retroactive to January 1, 2010). If Congress takes no action before the end of this year, in 2011 the federal estate and GST taxes will return. The top estate tax rate will be 55 percent (up from 45 percent in 2009), with a five percent surtax applied to certain large estates, and the estate tax exemption amount will be $1 million per individual (down from $3.5 million in 2009). Similarly, the GST tax rate will be 55 percent, and the GST tax exemption amount will be $1 million, indexed for inflation. The top gift tax rate will likewise be 55 percent, with a $1 million lifetime exemption. The carryover basis rules discussed above will no longer apply.

Review of Current Estate Planning Documents

If your estate planning documents use formulas related to the estate or GST tax, the repeal of the estate and GST taxes described above may significantly alter the disposition of assets under your estate plan, effectively cutting out certain beneficiaries and giving windfalls to others, contrary to your intentions. Note, however, that this repeal is not likely to cause a problem in the typical credit shelter/marital deduction plan without special GST planning where only one marriage is involved and the spouse is a beneficiary of both the marital and credit shelter trusts. In many of those cases where an undesirable shifting of interests could occur, the unintended result may be corrected by executing a simple codicil to your will or amendment to your revocable trust, although in some situations more significant revisions may be appropriate. If you are concerned about this, we recommend that you have your estate plan reviewed and, if necessary, updated to prevent any unintended dispositions of your assets.

Estate Planning Opportunities

The temporary repeal of the estate and GST taxes and the reduction in the gift tax rate may present various estate planning opportunities for those willing to take the risk that the estate and GST taxes will not be reinstated retroactively. If you plan to make taxable gifts (i.e., gifts in excess of the $1 million lifetime exemption and $13,000/$26,000 annual gift tax exclusion), you should consider doing so this year while the gift tax rate is only 35 percent (although it is possible that a higher gift tax rate will be enacted retroactively). You also may wish to consider making gifts to grandchildren or to trusts for their benefit with the hope of avoiding GST tax on such gifts. However, any such planning should take into account the possible retroactive reenactment of the GST tax and increase in the gift tax rate.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.