Repeal of the Estate Tax: What does it mean for your Estate Plan?
Whether you have a simple will or a sophisticated revocable trust, the repeal of the Federal Estate Tax for 2010 potentially has an impact on passing property to your heirs.
The transfer tax environment is currently in a state of flux. In 2001, Congress and President Bush enacted legislation reforming the taxes system for transfers of property via lifetime gifts or on death. The result was a scaled increase in the minimum amount of one’s gross estate subject to estate tax from $1,000,000 in 2001 up to $3,500,000 in 2009, coupled with a scaled decrease in the tax rates, from a maximum rate in 2001 of 55% to a maximum rate in 2009 of 45%. The 2001 legislation called for the repeal of the estate tax in its entirety in 2010.
However, with the repeal of the estate tax for 2010, came new income tax rules and “carry-over basis.” Under pre-2010 law, a beneficiary receiving property from a decedent under a trust or will took a “stepped-up basis” in the property for income tax purposes. This meant that, for income tax purposes, the property was re-valued at the time of death, and the beneficiary paid capital gains taxes when they eventually sold the property on the difference between the sales price and the re-valued, or stepped-up value of the property. For example, assume Dad bought 100 shares of stock in ABC, Inc for $500 in 1950. At his death, the 100 shares had a value of $50,000. Under Dad’s Will, the stock was devised to Son, and Son sold the stock 5 years later for $60,000. Before 2010, Son would have received a stepped-up basis in the property to $50,000, so that when Son sold the stock, he would only pay capital gains on $10,000 – the difference between the sales price ($60,000) and the stepped-up basis ($50,000). In 2010, under a “carry-over basis” regime, Son would receive the stock with Dad’s basis of $500 “carried-over” to Son so that when Son sells the stock, Son would pay capital gains on $59,500 – the difference between the sales price ($60,000) and the carried-over basis ($500). In 2010, each estate is allowed to allocate $1,300,000 of basis income to assets, as a pseudo-substitute for prior estate tax exemptions.
Making things more confusing, the 2001 legislation called for the estate tax to rise from the dead in 2011 under pre-2001 law. This means that if nothing is done in 2010 with respect to the estate tax, 2011 will usher in the old rules from pre-2001 whereby a gross estate over $1,000,000 will be subject to estate tax. Further, the old rates, with a maximum rate of 55%, will come back as well.
In the time since the 2001 legislation was enacted most estate planners and tax advisers believed that a full repeal of the estate tax would not come to fruition. However, for various reasons, no new legislation was enacted, although a few bills were introduced.
Despite this time of uncertainty, planning opportunities do exist.
The gift tax exemption is currently $1,000,000, which is the same as 2009 and will continue at that amount into 2011 under current law. However, the tax rate for 2010 is 35%, but is scheduled to rise dramatically to 55% in 2011, on gifts above $1,000,000.
This is also a good time to review your Trusts to ensure they still meet your goals relating to how assets are distributed for a surviving spouse and/or children after your death. An update of your documents may be necessary to avoid unintended consequences of funding your trust.
If you have questions about how this repeal may affect your estate plan, please feel free to contact Attorney Andrew Shotwell – ashotwell@smith-johnson.com
