As you have probably heard, Congress failed to enact estate tax legislation in 2009. This failure to act has caused legislation passed in 2001 to culminate into a repeal of the estate and generation-skipping transfer taxes in 2010. The repeal is followed by a reinstatement of the estate and generation-skipping transfer taxes in 2011, with a reversion to the transfer tax rules in effect in 2001. We had hoped that Congress would act quickly this year to reform the estate tax so that we would be able to provide a clearer picture of the status of the estate tax at this time.

As of now, and until Congress passes estate tax legislation, the estate, generation-skipping transfer and gift tax rates and exemptions for 2010 and 2011 are as follows:

  • There is no estate tax or generation-skipping transfer tax imposed on decedents dying in 2010. These taxes will return on January 1, 2011 with a rate of 55% (up from 45% in 2009), and an exemption of $1 million (indexed for inflation in the case of generation-skipping transfer taxes; this exemption amount is decreased from $3.5 million in 2009).
  • For decedents dying in 2010, the income tax basis of assets will not be "stepped-up" to their fair market value at date of death. Rather, the decedent's income tax basis will "carry over" to the persons who inherit the assets, subject to a $1.3 million step-up for heirs generally and a $3 million step-up for property left to a surviving spouse. On January 1, 2011, the stepped-up basis rules will return.
  • The gift tax continues to exist in 2010, but the tax rate is 35% (down from 45% in 2009). The gift tax rate will increase to 55% in 2011. The lifetime exemption for gift tax is $1 million for 2010 and 2011, and the gift tax annual exclusion amount continues to be $13,000 per donee in 2010.

If Congress enacts estate tax legislation this year, this legislation could be made retroactive to January 1, 2010.

The inaction by Congress leaves taxpayers and their counsel with a great deal of uncertainty. Additionally, it could cause unintended results for the estate plan of someone who dies in 2010 if Congress does not enact estate tax legislation that is retroactive to January 1, 2010. Most revocable trusts use terminology from transfer tax rules, such as "unified credit amount" and "maximum marital deduction." If there is no estate tax, the provisions of the trust may read differently than what was originally intended. Additionally, special language may need to be added to utilize the special basis adjustments described above for the estate of someone dying in 2010.

If you would like to discuss how these changes impact your estate plan, please contact one of the attorneys in our Tax or Estate Planning & Probate departments.

IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice within this client alert is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in a client alert.