Contrary to all expectations, Congress did not take action in 2009 to prevent the scheduled repeal of the federal estate tax. As a result, for the 2010 calendar year there will be no federal estate and generation-skipping taxes unless Congress acts to reinstate them. 

By way of background, a 2001 tax act gradually raised the federal estate tax exemption to $3,500,000 and lowered the maximum estate tax rate from 55% to 45%. This same law also provided that, just for the year 2010, the estate and generation-skipping taxes would be repealed, the income tax cost basis step-up for inherited assets would be limited, and the gift tax, though remaining, would have its rate decreased from 45% to 35%. The 2001 act also provided that, in 2011 and thereafter (unless Congress acts to prevent it), the changes to the estate, gift, and generation-skipping taxes will “sunset.” As a result, the exemptions from estate and gift taxes would return to $1,000,000 each, the exemption from generation-skipping taxes would be $1,340,000 (adjusted for inflation), and all three taxes would be increased to a maximum rate of 55%.

You may be asking, what does the “temporary” repeal of the federal estate and generation-skipping taxes mean to me, what will Congress do next, and how will any future changes affect me? Congress may pass legislation reinstating the estate and generation-skipping taxes in one form or another, perhaps retroactively to January 1, 2010, to prevent both the 2010 repeal and the 2011 tax increase, or Congress may allow the current law to run its course. At this time, nobody knows, and it is simply impossible to predict.

What we do know is that the 2010 repeal (and possibly any future changes) could have significant implications for existing estate plans, particularly (but not exclusively) those with provisions designed to reduce estate and generation-skipping taxes. For example, under commonly used bequests tied to an assumed estate or generation-skipping tax exemption, the 2010 repeal could affect the way assets will be divided among beneficiaries after death, causing unintended results unless those bequests are revised or the laws are changed. In addition, pending further Congressional action, the new rules may require the compilation and retention of cost basis information to minimize future capital gains taxes on inherited assets, and those taxes may apply even to estates that are otherwise exempt from the federal estate tax. Finally, in some instances, these changes may present valuable opportunities to minimize gift, estate, and generation-skipping taxes.

Each estate plan is unique and will need to be reviewed individually to determine the effects of these changes and whether any revisions should be made. We recommend that you contact us to discuss how these law changes may impact your specific estate plan and whether changes in your plan would be appropriate.