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Congressional Failure to Act Causes Estate Tax Uncertainty in 2010 - (Spring 2010)
CONGRESSIONAL FAILURE TO ACT CAUSES ESTATE TAX UNCERTAINTY IN 2010
After almost a decade of promising to create estate tax stability, Congress failed to pass long-awaited legislation affecting the federal gift, estate and generation-skipping transfer tax laws. As a result of this abject failure to act, we have begun 2010 without critical transfer tax provisions in place, and with significant uncertainty in the area of estate taxes.
Background
In 2001, Congress passed the Economic Growth and Tax Reconciliation Act (EGTRRA), a piece of sweeping tax legislation that made considerable changes to estate and gift tax law. The act included a one year repeal of estate tax in 2010 followed by a return to the pre-2001 exemption of $1 million and maximum rate of 55%. Apprehensive estate planning professionals have long feared the impact of this one year repeal and hoped that Congress would extend the 2009 exemption and rates until comprehensive transfer tax reform could be enacted.
Congressional Reaction to the One Year Repeal
Although the House passed an extension of the 2009 extension and rates, the Senate declined to act. Until Congress takes action, there will be no estate tax and generation-skipping transfer tax and the gift tax rate will be 35%, a decrease of 10% from the previous year.
However, Congress can still resolve this troubling estate tax issue by enacting an extension, possibly retroactive to January 1, 2010, or by taking some other route to avoid a zero estate tax.
How does the One Year Repeal Affect Current Estate Plans?
As a result of the one year repeal, if a person dies in 2010, there is no longer a limit on the amount that can pass free from estate tax. The impact of this repeal will vary case by case, but it is has already created uncertainty in the field of estate taxes and has the potential to seriously affect individual estate plans.
A married couple with assets that value over $1,000,000, may not be able to divide the assets at the first spouse’s death (if he or she dies in 2010), to keep the deceased spouse’s assets out of the surviving spouse’s taxable estate (assuming the surviving spouse dies after 2010). Up until 2010, we have been able to utilize an estate tax exemption for the deceased spouse at the time of his or her death, which ultimately reduces the estate tax upon the surviving spouse’s death. 2010 potentially takes away that option.
Summary of Laws Currently in Place
The following laws are currently in place for 2010:
The federal estate and generation skipping transfer tax is repealed.
The federal gift tax is still in effect, but at a 35% top rate.
The $13,000 annual gift exemption is still in effect.
The $1,000,000 lifetime gift tax exemption is still in effect.
The income tax basis of property acquired from a decedent who dies after December 31, 2009 is the lesser of the decedent’s adjusted basis or the fair market value of the property on the decedent’s death (no step-up in basis as in prior law).
What should you do now?
We encourage you to review your estate plan and evaluate the allocation provisions in that plan. It is always important to revisit your estate plan, but during this period of uncertainty, it is even more critical to re-familiarize yourself with the details of your plan.
Please do not hesitate to contact Kira Masteller if you have any questions concerning the one year repeal and its potential effect on your current estate plan. You can reach Kira at 818-783-5530 or through email at kmasteller@mrllp.com.
We are available to address all of your estate and tax planning needs and look forward to hearing from you.