Federal Estate Tax Expires for 2010
Trusts & Estates Law Update 01/19/10
Effective January 1, 2010, the federal estate tax, a tax levied on the value of a person's assets transferred as a result of death, ceased to apply to the estates of individuals dying in 2010. The generation-skipping transfer ("GST") tax, an additional tax levied on assets transferred to grandchildren or individuals in younger generations, also ceased to apply. Unless Congress acts to reinstitute these taxes, there will be no estate tax on transfers made in 2010 as a result of death. Also, there will not be any GST tax on transfers made in 2010, whether made through lifetime gifts or made as a result of death. Although the federal estate and GST tax systems are no longer in effect - as of this writing in January 2010 - those tax systems are scheduled to re-emerge on January 1, 2011 with an inflation-indexed exemption of $1 million (decreased from the December 31, 2009 amount of $3.5 million), and a maximum tax rate of 55 percent (increased from the December 31, 2009 maximum rate of 45 percent).
While the federal estate tax and GST tax systems are not currently in effect, the federal gift tax system is still in effect and continues to apply to lifetime gifts. For lifetime gift transfers made in 2010, the maximum exemption from the federal gift tax remains at $1 million, but the maximum tax rate is decreased from the December 31, 2009 rate of 45 percent to a new maximum rate of 35 percent.
Although in late 2009 Congressional leaders expressed confidence that estate and GST tax legislation would be enacted in early 2010 retroactive to January 1, 2010, considerable uncertainty exists over whether such legislation will be enacted. If a tax is enacted with retroactive application, litigation and constitutional challenges will likely result in significant questions that will not be settled for years.
To compound the challenges of planning during this uncertain time, a new law effective January 1, 2010 applicable to individuals passing away in 2010, implements a "carryover basis" system in which the cost basis of assets acquired from the decedent remain the same as in the hands of the decedent. This changes a "stepped-up" basis system that had been in existence for many years, and that had the effect of reducing capital gains taxes for estates and beneficiaries selling property received from a decedent. The new carryover basis regime does provide some relief, by allowing the executor
of the decedent's estate to elect to increase the basis of selected assets up to $1.3 million, and up to an additional
$3.0 million for assets passing to or for the benefit of the surviving spouse. Whether this new system will continue to
apply if the estate tax is re-enacted is an open question. However, most estate planners believe that if the estate tax
is reinstituted, the carryover basis rules will be repealed.
Quarles & Brady will continue to monitor congressional and Internal Revenue Service activity relating to these tax laws. If you have questions concerning the subject matter of this update, or if you are concerned about how these changes to the federal transfer tax laws might affect your estate plan, please contact your Quarles & Brady attorney. This update is intended as a general summary of legal matters and not as specific advice to any particular client.