The End of the Estate Tax?
January, 2010
By
Darin Christensen
The estate tax is a tax imposed on the transfer of the taxable estate at a person's death. Congress passed the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) in 2001. EGTRRA gradually increased the applicable federal estate tax exclusion from $1 million to $3.5 million in 2009, with additional amounts taxed at a maximum 45 percent federal tax rate. Under EGTRRA, the estate tax is repealed in 2010, but that repeal "sunsets" and reinstates the tax with a $1 million exclusion in 2011 and the higher maximum federal tax rate of 55 percent. When EGTRRA passed, everyone assumed that the legislature would adopt something permanent before 2010, and when nothing happened by 2009, everyone assumed that they would enact a one-year patch so that the 2009 rules would remain in place. However, on January 1, 2010 the estate tax and generation skipping transfer tax expired. EGTRRA did not eliminate the gift tax.
Consequences of a Repeal
Until the end of 2009, although there was an estate tax in place, most assets of the deceased person β no matter how valuable β got a"stepped up" (or in some cases a "stepped down") cost basis to the fair market value at the date of death. The stepped up basis for low basis assets eliminates capital gain taxes upon immediate sale by the estate, the trust or the beneficiary, and potentially reduces capital gain taxes on later sale. In typically confusing fashion, EGTRRA only allows a stepped up basis for up to $1.3 million in assets (plus up to $3 million more for assets going to surviving spouses). This limit on basis step up will increase capital gain taxes upon a subsequent sale of some assets in estates that are worth more than $1,300,000 ($4,300,000 if substantial assets are left to a surviving spouse). In reality, the elimination of the 45 percent estate tax will mean that most heirs of estates that don't get the full basis step up that they would have received under pre-2010 law are in the same or better position than they would have been in under present law. At least for a while, until Congress passes new legislation or 2010 ends without passage of any new legislation.
Look for Retroactive Action
The general consensus among estate tax practitioners and Washington politicians is that although the estate tax repeal has occurred, Congress will attempt to revisit this issue in the early months of this year and any new law passed in 2010 probably will contain a provision making it retroactive to January 1, 2010 (either retroactive for everyone affected or only electively retroactive). Once 2010 has passed, a retroactive rule is less likely and the motivation for change may be subsumed by the political process leading into 2012. Consensus and assumptions have failed us the past several legislative sessions since EGTRRA passed, making this a very interesting and uncertain time for tax planners and taxpayers alike.
Planning Implications
The days of the "onion skin will," a time when a taxpayer hired their lawyer once or twice in a lifetime to draft a short will on onion skin paper, have been over for some time. The changing and temporary nature of the laws governing the estate tax shines a bright light on the end of that era in estate planning. Now, more than ever, it is essential to meet with your estate planning attorney to discuss your plan and needs. Non-tax considerations, such as trust construction for family protection, planning for old age, incapacity, and philanthropy should be revisited to consider the potential impact of additional inheritance arising out of the possible elimination of the federal estate tax and potential overfunding of the traditional credit shelter trust due to the elimination of the estate tax. Tax considerations such as the ability to select the assets that get the benefit of stepped up basis may affect your selection of executor and trustee under your plan documents. You may want to make charitable gifts during your lifetime to reduce your own income tax burdens. As things stand now, the estate tax is set to return in 2011 to pre-EGTRRA levels with a $1 million exemption and a 55 percent tax rate. Coordination with applicable state tax laws, and planning for the return of the estate tax in either 2010 or 2011, if such should occur, requires you and your advisor to make difficult decisions together.
If you have a question about your future estate planning needs, please contact your Bullivant estate planning attorney at 1-800-654-8972.
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