Estate Planning Bulletin
ESTATE PLANNING BULLETIN
Despite the predictions of most estate planners that Congress would “fix” the federal law taxing transfers of property, the estate and generation skipping taxes went into “hibernation” on January 1, 2010. Unless Congress takes action – either retroactively or prospectively — we will have a one year hiatus followed by a return to 2001 law in 2011 and beyond.
Regrettably, the failure of Congress to act leaves us with a number of unresolved tax issues that could distort your estate plan if you (or your spouse) die during this period of uncertainty. Here are the highlights:
The Law Today
- No Estate Tax for 2010 Decedents. This is the good news.
- Carry-Over Basis. Now for the bad news: the income tax basis of assets inherited from 2010 decedents will not be automatically adjusted or “stepped-up” to the date of death value. This means greater potential for capital gains tax. The exceptions are: (1) the executor/trustee will be able to allocate up to $1,300,000 worth of stepped-up basis to the estate assets; and (2) an additional $3,000,000 of basis may be allocated to assets passing to a spouse or certain type of trust for the benefit of a spouse. Special planning may be necessary if you are married and hold assets with more than $1,300,000 of appreciation.
- Formula Tax Planning for Married Clients. The new law impacts married couples more than unmarried individuals. Many estate plans for married couples employ a formula that divides an estate into two portions: one (the marital deduction share) that is sheltered from estate tax because it benefits the surviving spouse and the other (the exempt share) which is sheltered from tax by the estate tax exemption (whatever that amount may be) and which can be applied for the benefit of descendants as well as a spouse. In most cases, these plans will work just fine under the 2010 law. However, in some cases there may be serious unintended consequences. For example, if the spouse has no interest in the exempt share, then the spouse may receive nothing. If you have concerns about the way your plan might work in the event of death in 2010, you should request an estate plan review.
- Generation Skipping Tax (“GST”). The GST also expired as of December 31. Many trust documents provide that GST-exempt shares will be held in lifetime trusts for the children which then pass on to grandchildren, while the non-exempt shares are distributed outright to children. With the GST in “hibernation” during 2010, there is no GST exemption to allocate and no GST tax. Therefore, such formula provisions may be meaningless and cause certain beneficiaries to receive a windfall while others receive nothing. Again, if you have concerns about the way your trust is drafted, please call us for a review.
- Out-of State Property. California does not have a stand-alone estate tax. However, about half of states have adopted their own estate tax regimes, which will continue to apply to real property owned in such states — even if the decedent is a resident of California. Special planning may therefore be required if you own real property in one of those states.
- Gift Tax. The federal gift tax continues to apply in 2010! The lifetime exemption remains at $1,000,000 and the annual exclusion remains at $13,000 per donee. Gifts in excess of the annual exclusion must still be reported on a gift tax return. The top gift tax rate is reduced from 45% to 35% for 2010.
- Reversion to 2001 Law. If no estate tax legislation is enacted before January 1, 2011, we will return to 2001 law, which means the estate and gift tax exemptions will be $1,000,000, the GST exemptions will be $1,340,000, and the top estate, gift, and generation-skipping tax rates will increase to 55% (plus a possible 5% surcharge for the largest estates).
- Return of Stepped-Up Basis. The good news is that the rule allowing unlimited step-up in basis to date of death value will return.