Estate Tax Update

Our recent client survey revealed estate planning as a key area of interest for many of our clients.  Because of the high level of interest, we are pleased to present you with the following estate tax update.The federal estate tax is dead—at least for now.It is 2010, and the temporary, one-year repeal of the federal estate tax is in effect.  The failure of Congress to either extend the 2009 estate tax rules into 2010 or enact a permanent estate tax law has created several unfortunate consequences.Here are some things you need to know to protect your family and your assets.

  • In 2010, the tax law repealed both the federal estate tax and the federal generation-skipping transfer tax (a separate tax on property given to grandchildren, great-grandchildren, etc.).  Congress may enact legislation to reinstate them, retroactive to January 1, 2010.
  • Both taxes are scheduled to return in 2011 at levels that applied prior to 2001; that means a $1 million exemption and a top tax rate of 55% (in 2009, the exemption was $3.5 million and the top rate was 45%).
  • The federal gift tax remains in effect with a $1 million lifetime exemption, and the top tax rate is 35% down from 45%.
  • The tax law modified the step-up in basis rule that allowed heirs to inherit property with a fair market value as of the date of death of the decedent.  For 2010, the basis for inherited property is the lesser of the decedent’s basis (carryover basis) or its fair market value on the date of death.  However, the law afforded a step-up in basis on $1.3 million of estate property, and additionally up to $3 million of property passing to a surviving spouse receives a step-up as well.
  • The modified carryover basis rules impose strict reporting requirements, including supporting documentation and penalties for noncompliance. Organize your records and get your parents/grandparents/children to organize theirs.

It is anyone’s guess what Congress will do next. Some believe quick action will reinstate the taxes at 2009 levels (see above). Others believe Congress will proceed cautiously in an attempt to enact serious reform.  In either case, any reinstated tax may be retroactive to January 1, 2010.  Planning under these circumstances is challenging, at best.If your estate plan assumes, as most do, the imposition of an estate tax in 2010, it may no longer carry out your intentions, it may not provide adequately for your spouse, and it may not meet your overall tax objectives. Please consider how the following issues may apply to your situation.

  • See your estate-planning attorney about the possible need to revise your will, trust, and other estate planning documents, especially if they include formula clauses. A formula clause expresses certain bequests in terms of fractions or percentages in order to eliminate or reduce estate taxes.
  • Your estate plan may not properly execute your wishes if your estate planning documents reference terms like “marital deduction,” “unified credit,” or “exemption amount.” If so, you should consult with your estate-planning attorney immediately.
  • You may also need to see your estate-planning attorney about these documents if you live in a state that imposes its own estate and/or inheritance tax, or if your documents include multi-generational planning.

Estate planning is often the most challenging area in our wealth management process, because clients have an understandably natural aversion to the topic and without encouragement, things often go undone.  Depending on your estate size, ignored or improper estate planning can cost your heirs significant inheritance dollars, and those dollars go to the federal government instead of your heirs and charities.  Please contact us if you need assistance finding an estate-planning attorney or if you have questions about how the changes in the law may affect you.

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