This is to advise you of changes in the federal tax laws that may have an effect on your current estate plan.
1. Is There a Federal Estate Tax in 2010?
A 2001 law reduced the bite of the Federal Estate Tax each year until 2010, when it ceases to apply - only to apply to estates of persons who die in 2011 and thereafter, at the same rates and exemptions from tax that applied on December 31, 2001. The 2010 repeal and the rollback to 2001 that is slated to take effect on January 1, 2011 were budgetary "gimmicks" which no one thought would ever come into being, but that is the state of things today. Bear in mind that the Federal Gift Tax was not repealed; in 2010 the tax applies at 35% on taxable gifts made over the taxpayer's lifetime to the extent the gifts are greater than $1,000,000 (lifetime total per taxpayer).
The tax basis of the decedent's assets that are held by the estate and its beneficiaries is also difficult to determine. The assets of the estate of a taxpayer who died on December 31, 2009 were increased, or decreased, to the value of each asset as of the date of death. This is known as "step up" basis, although, if assets have declined in value, it can equally be a "step down" basis. In 2010, because of the temporary repeal of the Federal Estate Tax, the assets' basis will, in general, be whatever the decedent's tax basis was in the asset immediately before death, with a number of modifications so that at least some assets will be stepped up or stepped down ("Carryover Basis").
Anyone who has ever been a fiduciary or adviser of an estate knows that determining what the decedent's basis in any particular asset can be difficult. For real estate, and for long-held illiquid assets of all kinds, this determination can at best be only an educated guess. In theory, educated guesses are allowed on tax returns, and a court may hold that where a taxpayer inherits assets and cannot prove what the tax basis is, the basis is zero.
One reading of the law is that the special Carry-over Basis rules above expire in 2011, and therefore we recommend that Executors for estates where the decedent died in 2010, wait until 2011 to sell significant assets, as the former rule of stepped up basis may resume in 2011 even for estates where the decedent died in 2010, even if the Federal Estate Tax is not retroactively repealed.
2. No Repeal for Residents of New York, Connecticut, and New Jersey
These states still impose a state level estate tax, as do many other states. Many states allow certain elections to be made if there is a corresponding election made on a federal estate tax return. If there is no Federal Estate Tax it is unclear how some of the state estate taxes will be imposed, and certain estates will pay more state estate taxes than previously contemplated when the estate planning was put in place.
3. Will the Federal Estate Tax Be Retroactively Reimposed in 2010?
Most estate planners and many in Congress believe that a law will be passed in 2010 retroactively imposing an estate tax for federal purposes in 2010. In fact, we think this is the consensus of those who practice in this area. As we get further into 2010, however, it becomes less likely that this "Retroactivity" will happen. There also is uncertainty in the law as to what happens to transfers made in 2010 prior to a retroactive estate tax law, and that uncertainty may take years to resolve in the courts.
We think that as many as 95% of those who we drafted Wills for in the past 8 years will not need to make changes in their Wills due to concerns about federal estate tax changes in 2010, but there may be certain state level estate taxes that may or may not be optimum in 2010 depending upon a client's particular situation. For years after 2010, assuming that the law is not changed, virtually all clients of this firm who we have drafted documents for in the past 11 years will not likely have to make changes to their documents. However, a review of their documents is warranted if their family situation or net worth has materially changed since their estate plan documents were executed.
4. Action Plan
Review of one's Wills and other estate planning documents should be made to see how these would apply under the 2010 law. Some people may be able to benefit from the one-year repeal, depending upon their personal circumstances. In some cases, a codicil or similar amendment, containing provisions that would apply only during the repeal of the Federal Estate Tax, could be implemented.
Another opportunity applies to the one-year repeal of the Federal Generation Skipping Tax ("GST"). This tax is most often paid by grandparents who have transferred wealth to grandchildren when those grandchildren's parents are still living. The tax is levied because of the "skipping" of a taxable transfer to the parents' generation. This tax, which is hated and widely misunderstood, can be defeated simply through making gifts to grandchildren, incurring the Gift Tax, which is lower than the skipping tax. How this would work with retroactive reimposition of GST in 2010 is not clear.
If you have any questions concerning any tax matters, please contact Steven M. Etkind, 212-573-8412 (setkind@sglawyers.com) or Roger D. Lorence,