18 September 2019 - Article
To the surprise of many, Congress adjourned for 2009 without acting to extend the federal estate and generation-skipping transfer (“GST”) taxes into 2010, thereby causing a one year repeal of the estate and GST taxes effective January 1, 2010. Although Congress may act early in 2010 to reinstate the estate and GST taxes retroactive to January 1, it is not known what tax rates and exemption amounts will apply, if and when the taxes are reinstated. In addition, some observers believe that a retroactive reinstatement resulting in the taxation of the estates of persons who had already died in 2010 may raise Constitutional issues that could take years to resolve.
As the law now stands, the estate of a decedent who dies in 2010 will not be subject to estate or GST tax, and lifetime transfers made on or after January 1, 2010 will not be subject to GST tax. However, the federal gift tax will remain in place, with a $1 million lifetime exemption (unchanged from 2009) and a top gift tax rate of 35% (reduced from 45% in 2009). State estate, gift and GST tax laws are not affected by the federal changes and still need to be taken into account in planning.
In conjunction with the repeal of the estate and GST taxes on January 1, estate property will no longer be entitled to the “step-up” in basis that currently allows an adjustment to fair market value for most assets in a decedent’s estate. Instead, there will be a carry over basis regime under which appreciated estate property in the hands of an estate or a beneficiary will carry the same basis as when it was owned by the decedent. Executors may allocate $1.3 million to increase the basis of estate assets passing to any beneficiary and may allocate an additional $3 million to increase the basis of assets that pass to a surviving spouse outright or in certain marital trusts. To the extent that the basis of estate assets is not adjusted to fair market value with the available exemptions, capital gains tax will be imposed upon the sale of such assets by the executors or by a beneficiary.
Under present law, the January 1, 2010 repeal of estate and GST taxes and the imposition of carryover basis is effective only for 2010. Absent Congressional action, the estate and GST taxes, and the step-up in basis, will be reinstated on January 1, 2011. At that time, the estate and GST exemption amount will revert to $1 million and the top estate and GST tax rate will revert to 55%.
In light of the anticipated repeal, you may wish to review your estate plan and discuss it with your advisor at Withers Bergman. Repeal may offer new planning opportunities for some clients. It may be a good time to consider gifts to grandchildren and more remote descendants. Planning to maximize asset inclusion on the death of the first spouse could also be helpful to your immediate heirs. Perhaps most importantly, you should review whether, in the absence of estate and GST taxes, your Will and Revocable Trust continue to operate in a manner that is in harmony with your wishes.