What ever became of the Federal Estate Tax?

Types : Alerts

Much to the surprise of practitioners in the estate planning area, Congress did not, prior to the end of 2009, act to eliminate the uncertainty about the federal estate, gift and generation skipping taxes (the “transfer taxes”).  As the law stands in February, 2010, for decedents dying in 2010 there is no federal estate tax.  Also, there is no generation skipping tax for transfers made in 2010.  However, the gift tax remains in place with a $1,000,000 lifetime exemption per donor and a 35% rate of tax.  The gift tax annual exclusion remains at $13,000 for gifts made in 2010.  Gifts of no more than the annual exclusion do not result in any gift tax or in any use of the $1,000,000 lifetime exemption.

If there is no change in the law this year, beginning in 2011 the estate and generation skipping tax will re-emerge.  The exemption from the federal estate tax will be $1,000,000 per decedent and the maximum marginal estate tax rate, and the generation skipping tax rate, will be 55%.  For decedents dying in 2009, the estate tax exemption had been $3,500,000 and the maximum marginal estate tax rate, and the generation skipping tax rate, had been 45%.

It was widely thought that Congress would act last year (or last decade) to avoid the elimination of the estate and generation skipping tax for 2010 and to make permanent whatever law they enacted.  That did not occur, although some speculate that this year Congress will enact new transfer tax legislation and attempt to make the new law retroactive to January 1, 2010 so that it will apply to estates of decedents dying this year.  It is unclear whether the application of the estate tax to the estates of decedents who die in 2010 prior to the passage of any new law would be permissible.

It is noteworthy that (again, as the law stands today), as a consequence of the one-year elimination of the federal estate tax, for decedents who die in 2010 the step-up in basis rules which had applied through December 31, 2009 (which “stepped-up” the basis for capital gains purposes of all assets included in a decedent’s estate) do not apply.  For 2010, those rules are replaced with a limited step-up in basis under which assets selected by the decedent’s executor are stepped-up by $1,300,000 for assets passing to non-spousal beneficiaries and by an additional $3,000,000 for assets passing to a spouse or to a trust qualifying (under prior law) for the marital deduction.

The current state of the transfer taxes is complex, to say the least.  This makes estate planning challenging in many client situations.  If you have questions about how these laws apply to you or your family, or would like to discuss your estate planning generally, please contact any member of the Montgomery McCracken, LLP Trusts and Estates Practice Group.

As required by United States Treasury Regulations, the reader should be aware that this communication is not intended by the sender to be used, and it cannot be used, for the purpose of avoiding penalties under United States federal tax laws.