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Estate Taxation Bulletin
Posted by: Paul Gottlieb
March 08, 2010

Many of our clients are aware of the peculiar federal estate tax rules that have been in place since 2001, when the estate tax exemption was increased incrementally from $1,000,000 in 2001 to $3,500,000 in 2009 and the marginal rate was gradually reduced to 45% in 2009. The federal gift tax lifetime exemption of $1 million remains the same for now.

In 2010, since Congress (specifically the Senate) did not act prior to 1/1/2010, the federal estate and generation skipping taxes have been repealed for one year only, and will be reinstated in 2011 with a $1,000,000 exemption and a 55% marginal rate.

Estate tax practitioners assumed that Congress would solve the problem before January 2010. Unfortunately, Congress did not act; many people have characterized the lack of action as "Congressional malpractice." Therefore, effective 1/1/2010, there is no federal estate or generation skipping transfer tax for one year only.

For many people, this will not be a problem. However, the lack of the estate tax eliminates the concept known as "stepped-up basis," which is one of the few good things that results from death. An asset inherited from a decedent receives the current (date of death) value, thus eliminating capital gains for income tax purposes. However, this year, the automatic change in basis does not and will not occur. Instead, the deceased owner's income tax basis in his or her assets will "carry over" to the person who inherits the asset. The statute does allow for a $1.3 million exemption for non-spousal gifts and a $3 million exemption for spousal gifts when calculating the capital gain.

The elimination of stepped-up basis can be critical for many of our married clients whose assets total or exceed $7,000,000 ($3,500,000 per person). Under the old system, there would be no federal estate tax and the basis of their capital assets would be stepped-up to the date of death value, thereby eliminating any capital gains taxes. Now, factual research must be done in order to ascertain the basis of each asset. Good luck on finding that advice slip issued in 1973 by the brokerage firm, which may not still be in business.

Many existing estate plans contain language which requires setting aside the exemption amount in a trust for the benefit of the surviving spouse, which is intended to save estate taxes on the death of the second spouse. Unfortunately, now that there is no Federal estate tax, this plan may no longer work. It is imperative that all estate plans be reviewed.

Another potential problem is that many people believe that Congress will attempt to reinstate the federal estate tax retroactive to January 1, 2010. Since federal estate tax returns are not due until nine months after death, there is ample time for Congress to reinstate The federal estate tax before a tax return would be due. Although taxes have been retroactively reinstated in the past, and judicially upheld, this particular reinstatement, due to the political climate in Washington, will most likely be challenged and the uncertainly will most likely continue for quite a while.

In summary, the inaction of Congress and the temporary repeal of the federal estate and generation skipping transfer taxes create confusion. All estate plans should be reviewed as soon as possible and the situation should be monitored as the drama, with possible retroactive reinstatement, unfolds.

Please be aware that New York State has not rescinded the New York State Estate tax on estates over $1 million.

We strongly advise you to contact us to review your estate planning documents and to determine how the current laws affect you and your estate.

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