February 22, 2010 Volume 2, No. 2
This estate tax edition of Currents is from Robert F. DeMeter, Esq. a taxation and estate planning partner of the firm. Please contact Bob at firstname.lastname@example.org to inquire about the subject matter of this issue.
Estate Tax Alert
The Federal Estate Tax Repeal – Sailing
in Uncharted Waters
As you may have learned from The Wall Street Journal, The Los Angeles Times or other news sources, Congress did not pass legislation by the end of 2009 to extend the federal estate tax and the 2009 tax rates and exemption levels. Accordingly, as of January 1, 2010, the federal estate tax and generation-skipping taxes have been repealed. The repeal is scheduled to be in effect for one year, but many in Congress have promised retroactive reinstatement of the estate and generation-skipping taxes retroactive to January 1, 2010. The Federal gift tax, however, remains in effect, albeit at a lower rate (35% v. 45%), with the existing annual exclusion ($13,000) and the existing lifetime exemption ($1,000,000).
Carry Over Tax Basis Regime
The repeal of the Federal estate tax is accompanied by a change to the income tax treatment of a decedent's property. For decedents dying in 2010, the basis of the assets in the estate will not be adjusted to the fair market value as of the date of death as was the case under prior law. Instead, the beneficiaries of the decedent's estate will receive "carry over" basis in the assets. This means that a beneficiary's basis in the asset will be the same as the decedent's adjusted basis as of his or her date of death. There are exceptions to this rule. In general, assets passing to a surviving spouse that have up to $3,000,000 of appreciation over the decedent's adjusted basis receive a "step-up" in basis to the date of death value if certain conditions are met. In addition, assets passing to any other beneficiary or beneficiaries with up to $1,300,000, in the aggregate, of appreciation over the decedent's adjusted basis may receive a step-up in basis to the date of death value. The amount available for this basis step-up could increase if the decedent had certain unrecognized losses at the time of death.
Reinstatement of Estate Tax in 2011, or Retroactively to 2010
Unless Congress passes estate tax reform legislation in 2010, the Federal estate tax will be reinstated in 2011, with an exemption of only $1,000,000 and a maximum tax rate of 55% (with an additional 5% tax on the portion of the estate between $10,000,000 and $20,000,000). It is possible that Congress will pass estate tax reform legislation in 2010 that will be effective retroactive to January 1, 2010. Any such retroactive enactment of the Federal estate tax could be subject to constitutional challenge in the courts. This could cause further delay and confusion. As a result of the uncertainty surrounding the Federal estate tax, estate planning decisions will be difficult to make. Hopefully, Congress will enact a new law soon.
Generation-Skipping Transfer Tax Repealed
The generation-skipping transfer ("GST") tax that applies to most transfers from a grandparent to a grandchild or more remote descendant is also repealed for one year, beginning January 1, 2010. As with the estate tax, Congress could retroactively reinstate the GST tax to the first of the year. Nevertheless, there may be planning opportunities for gifts to dynasty trusts (for the continuing benefit of your descendants) in 2010.
Gift Tax Remains in Effect
Unless otherwise changed by legislation, the Federal gift tax will remain in effect in 2010. The lifetime exemption from gift tax continues to be $1,000,000 and is not indexed for inflation. Thus, a person may make up to $1,000,000 of aggregate lifetime gifts – in excess of (i) gifts that qualify for the marital deduction, (ii) the gift tax annual exclusion amount and (iii) payments of certain medical and tuition expenses directly to the provider – without having to pay any gift tax. The gift tax annual exclusion amount also remains unchanged, at $13,000 per donee (or, $26,000 per donee for spouses electing to gift split) in 2010.
Gift Tax Rate
In 2010, the gift tax rate is tied to the top marginal income tax rate, which means the gift tax rate drops from 45% to 35%. If, however, Congress passes retroactive estate tax legislation in 2010, there is a risk that it could also retroactively raise the gift tax rate. Although we cannot be certain, it may prove beneficial to make any gifts that could cause Federal gift tax to be incurred as early in 2010 as possible, just in case any 2010 legislation is made prospectively, and not retroactive to January 1, 2010. In that event, early planning would enable donors to take advantage of the 35% gift tax rate.
It has always been our goal to provide clients with flexible estate planning documents designed to accommodate changes in tax laws and family circumstances. However, in light of this new uncertainty created by Congress, you may wish to contact us in the new year to ensure your estate plan continues to meet your goals.
Currents is intended to be educational only. It is designed to provide our clients and friends with the discussion of current topics and legal authorities as applied to those topics. Currents is not intended to constitute legal advice or provide any opinion about the application of such legal authorities to a particular circumstance, set of facts or situation. In addition, that you have received transmission of Currents does not create any relationship of attorney and client between Clark & Trevithick, PLC and you.
Clark & Trevithick, PLC is a full service law firm representing clients throughout California and western states for more than three decades. Our practice includes specialization in federal and state taxation law and tax reporting compliance, as well as estate planning for owners of closely-held businesses and other high net worth individuals. We also counsel on the sale of closely-held businesses. We develop methods for transferring wealth to surviving spouses and descendants by the most efficient and tax-advantaged methods available. Our practice profile also includes corporate, real estate, litigation, creditors' rights and remedies and employment law matters.
CIRCULAR 230 DISCLOSURE
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