Estate Tax Bulletin

January 15, 2010

Despite expectations to the contrary that were shared by virtually all estate planners and political observers, Congress recessed for 2009 without passing a law preventing the scheduled temporary repeal of the federal estate and generation-skipping transfer (“GST”) taxes. As a result, unless Congress takes retroactive action, effective January 1, 2010:

  • the federal estate tax is repealed;
  • the federal GST tax is repealed;
  • the federal gift tax remains in effect, with an exemption amount of $1,000,000, but with a top rate of 35% (reduced from 45%); and
  • the automatic step-up in basis (i.e., a basis equal to date-of-death fair market value) for inherited assets is largely eliminated.

Unless Congress acts, in 2011 the federal estate and GST taxes will be reinstated, and a unified federal estate and gift exemption amount of $1,000,000 with a top rate of 55% will be restored. The GST exemption will revert to $1,000,000, adjusted for inflation from 1997. The federal gift tax rate will also rise to 55% at that time, and the automatic step-up in basis will be reinstated.

The most significant result of these confusing changes is that under current law, in 2010 – and only in 2010 – the estate tax is repealed, after which time the estate, gift and GST taxes could become significantly more onerous than they were in 2009.

The basis of assets in the estate of an individual dying prior to 2010 is generally equal to the date-of-death fair market value of the assets. Under current law however, the basis of assets in the estate of an individual dying in 2010 will be the lesser of (i) the date-of-death fair market value or (ii) the decedent’s basis. The assets will receive a $1,300,000 basis increase that can be allocated by the Executor among any of the assets in the decedent’s estate (but not in excess of date-of-death fair market value). With regard to assets passing to a surviving spouse, an additional $3,000,000 basis increase may be allocated.

None of these changes directly affect state estate taxes. New York’s estate tax will continue with a top rate of 16% and a $1,000,000 exemption amount, and New Jersey’s estate tax will continue with the same 16% top rate and a $675,000 exemption amount. Connecticut has enacted a new law effective January 1, 2010, which has a top rate of 12% and a $3,500,000 exemption amount.

On December 3, 2009, the House of Representatives passed a bill that would make permanent the 2009 estate, gift and GST tax law. This would result in a unified exemption amount for estate and GST tax purposes of $3,500,000, an exemption amount for gift tax purposes of $1,000,000, and a top estate, gift and GST tax rate of 45%.

Although a bipartisan bill that would permanently extend the estate tax at its 2009 levels was introduced in the Senate in November 2009, the Senate recessed for 2009 without taking further action on this bill and is not scheduled to reconvene until January 19, 2010.

It is likely (but by no means certain) that any bill passed by Congress in 2010 concerning the estate, gift, and GST taxes will be made retroactive to January 1, 2010. However, many scholars have questioned the constitutionality of a retroactive tax bill in this context, and so it may be many years and several court cases before it is entirely clear whether such a bill legally can be made to apply retroactively.

We do have some specific tax planning opportunities arising as a result of the current situation that might work out well for those who act quickly, but because of the uncertain legislative environment and the potential for retroactive reinstatement of the estate and GST taxes (and retroactive increase in the gift tax rate), no outcome can be guaranteed.

However, we do recommend to all our clients that they consider taking prophylactic measures in light of these recent changes in the law, including signing a short Codicil to authorize the Executor explicitly to allocate basis among estate assets pursuant to the new rules. (Although such a codicil may not be absolutely imperative, we recommend the change for the avoidance of doubt and to protect the Executor from potential liability.) In addition, for those married clients whose Wills or Revocable Trusts contain formula Credit Shelter Trusts, and for those clients who have provided in their Wills for long-term trusts that are exempt from generation-skipping transfer tax, we recommend consideration of a short Codicil or Trust Amendment to remove potential ambiguity. (With the repeal of the estate tax and GST tax in 2010, the construction and operation of Wills containing references to repealed Internal Revenue Code sections may be subject to varying interpretations.) In any event, we encourage you to contact us if you have any questions or would like to discuss your personal situation in further detail.

In addition, all of the specialized arrangements we have been recommending and implementing for our clients (particularly those in the investment management business) remain viable and continue to offer utility in the correct circumstances. Some have been affected by the recent law changes in ways you may wish to discuss. In any event, we encourage you to contact us if you have any questions or would like to discuss your personal situation in further detail.

If you have any questions regarding this Bulletin, please contact one of the attorneys listed below.


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