Estate Planning

Estate Planning for 2010

As you may recall, the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”) repealed the estate and generation-skipping tax for individuals dying in 2010 and then reinstates the estate tax under unfavorable terms for individuals dying in 2011.  Eight years after enactment, Congress still has not decided on what to do with the transfer tax system regarding estates, gifts, or generation-skipping transfers.  Say what you will about their competency, the confused state of affairs will no doubt lead to many taxpayer questions as we head into 2010. 

Under EGTRRA, the repeal of the estate tax and the generation-skipping transfer tax is effective only for individuals dying in 2010.  Because of the sunset rules contained in EGTRRA, Congress left in place the rules in effect prior to enactment of EGTRRA.  Under pre-2001 Act law, there was no gift tax and no estate tax on the first $675,000 of combined transfers during life or at death, for gifts made and individuals dying in 2001.  These two taxes were tied together under a unified system having a top rate of 55%.  However, there were and still are differences between the gift tax and the estate tax.  One difference potentially affected the income tax of recipients of gifts and heirs of estates.  A donee-recipient generally assumes the donor's basis for a gift.  As a result of this carryover basis, if there is a gift of appreciated property, the gift preserves the reportable gain which the donee will pay tax on if disposed.  Inherited property acquired from a decedent, however, generally gets a step-up in basis equal to its value at his death meaning that a later sale by the heir will only produce gain or loss to the extent the FMV at date of sale is more or less than the FMV at date of death of the decedent. 

Other significant features of pre-2001 Act law include:

• EGTRRA substantially increased the $675,000 exemption in increments.  For individuals dying in 2006 through 2008, the exemption was $2 million.  It rose to $3.5 million for individuals dying in 2009.  Under the “sunset rule,” the exemption will be $1 million for both estate and gift tax purposes in 2011. 
• Under the 2001 Act, the top estate and gift tax rate was reduced in increments.  It was 46% for individuals dying and gifts made in 2006, dropping to 45% for transfers in 2007 through 2009.  In 2010, there will be no estate tax and the top gift tax rate will be 35%.  The top estate and gift tax rate reverts to 55% in 2011.
• For 2010, the basis rules for inherited property will be similar to the gift tax rules but with many opportunities for heirs to get increases in basis.  For example, it will be possible to increase the basis of assets received from an individual dying in 2010 by $1.3 million and by an additional $3 million for assets going to a spouse.  Under the sunset rule, the pre-2001 Act step-up in basis rules return for 2011.
• EGTRRA made other changes to the transfer tax rules that also are scheduled to sunset after 2010.  For example, it repealed the state death tax credit and replaced it with a deduction.  Under the sunset rules, the deduction would end and the credit would return in 2010.
• The 2001 Act also repealed the qualified family-owned business deduction, which would return in 2011.
• And what of the states (such as Illinois) that have inheritance or estate laws which either conform to or are decoupled from Federal laws.  

Now for the question that everyone will ask which is—what Congress will do.  As Congress has still not addressed these transfer tax issues as of today, it seems likely that something will be done in 2010.  On December 3, 2009, the House, by a vote of 225 to 200, approved H.R. 4154, the Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Act of 2009 which would make permanent the present-day law regarding estate, gift, and generation skipping transfer taxes.  The Senate has not acted on this measure or on a bill introduced in the Senate by on November 19, 2009 to permanently extend estate tax.  Under that bill, the value of any estate above $7 million per couple or $3.5 million per individual would be taxed at a 45% rate.  There is also a bill pending with Congress regarding extenders of various popular income tax deductions and credits and it may be that the transfer tax rules will be dealt with there. 

In any event, it is likely that some sort of action will be taken early on in 2010.  What the final outcome will be is uncertain. Check back to www.dhjj.com for updates.

Please always consult with your tax advisor for information regarding estate planning.