Federal Estate/Gift Taxes in Flux Beginning in 2010 - 3/5/2010
CLIENT ALERT
Portions of the 2001 tax act (no typo on the year, there!) with delayed effective dates will dramatically affect many estate plans, beginning in 2010. Many individuals will want to revise their estate plans because of the impact of the changes.
By way of background, the 2001 tax act gradually reduced the federal estate tax in the ensuing years (through 2009) by increasing the amount that was exempt from tax and reducing the top estate tax rate. In addition, the 2001 law actually repealed the estate tax in its entirety for individuals dying in 2010. However, to comply with then current federal budgetary constraints, the 2001 law also contained a “sunset rule”, under which the pre-2001 tax act estate/gift tax laws are to be reinstated in 2011.
Over the last several years, Congress recognized the estate planning confusion that this shifting regulatory structure would create beginning in 2010, and considered various fixes – ranging from an extension of the 2009 rules, to a permanent increase in the estate tax exemption amount, to outright repeal of the estate tax. However, for partisan and other reasons, Congress has not been able to agree on an appropriate fix, which means that the provisions of the 2001 tax act are now effective in 2010.
To briefly summarize the more significant rules now in place for 2010:
- there is currently no estate tax;
- there is currently no generation-skipping tax (“GST”);
- the top gift tax rate is 35% (the gift tax lifetime exemption amount of $1 million and the $13,000 (indexed) annual gifting exclusion remain in effect); and
- the income tax rule providing for a basis step-up for inherited assets has been eliminated, with modified carryover basis rule now applying. (This was generally intended to increase the tax resulting from capital gains realized when inherited assets are later sold).
For 2011, the following rules are scheduled to take effect:
- the estate tax would return, with only a $1 million exemption amount (the gift tax exemption amount would remain at $1 million);
- the GST tax would return with a $1 million exemption amount (indexed for inflation since 2001);
- the top “unified” tax rate for estate, gift and GST tax purposes would be 55%; and
- the income tax basis step-up rules would return.
While several members of Congress have indicated that they intend to address this estate/gift tax confusion, there is no guarantee when or if they will actually take action; and no certainty as to what the specific fix might look like. In addition, there is a question as to whether any attempt by Congress to now impose an estate tax retroactively effective to January 1, 2010 passes constitutional muster.
Though much uncertainty remains with respect to the future of the estate/gift taxes, there are a number of reasons that individuals may want to review their estate plans now. For example:
- Some estate plans define the amount that will pass to a surviving spouse or other beneficiary in terms of the estate tax exemption amount. With this amount fluctuating ($3.5 million exemption in 2009, unlimited exemption in 2010, and scheduled $1 million exemption in 2011 and after), the amount various beneficiaries receive could vary drastically from what was originally intended.
- Similarly, some plans define the amount going to a spouse in terms of the estate tax “marital deduction”. Currently, there is no marital deduction, which might mean that a surviving spouse would end up with nothing from an estate.
- The current relatively low (35%) gift tax rate could provide an opportunity for inter-generational asset transfers at historically low transfer tax rates (with the risk that Congress might attempt to impose some retroactive gift tax rate increase).
These are just a few of the complexities and opportunities presented by the changing estate tax laws.
If you have any questions on the implications of the current estate/gift tax rules and how they affect your estate plan, please contact Jeff Perlmuter at (216) 515-1654, Ralph Higgins at (216) 515-1617 or Bernie Niehaus at (216) 515-1607.
This document is intended to provide general information about legal developments, not legal advice.
Receipt of this information does not create an attorney-client relationship.
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