ESTATE TAX REPEAL

In 2001 changes to the federal estate tax, generation skipping transfer tax, and gift tax were passed by Congress.  These changes were scheduled to take effect, and did take effect, in 2010.  So what are the changes and how might they affect you? 

In 2009 an estate valued up to $3.5 million was exempt from federal estate and generation skipping transfer taxes upon a person’s death.  In other words, a person who passed away in 2009 could transfer assets up to $3.5 million without having to pay federal estate taxes or generation skipping transfer taxes.  For an estate greater than $3.5 million the tax rate was 45%.  There is also a gift tax exemption of $1 million.  If a person used the $1 million gift tax exemption during his or her life then the $3.5 million exemption for estate and generation skipping transfer taxes was reduced to an exemption of $2.5 million.  The Estate Tax is currently repealed (if Congress does not act retroactively), meaning that for the year 2010 no estate is subject to estate or generation skipping transfer taxes.  There is still the $1 million gift tax exemption. 

Another major change, that will probably affect many more people, is the change to the rules regarding a step up in basis.   In 2010, instead of a beneficiary receiving an estate asset with a basis equal to the estate tax value, the beneficiary takes the asset with a carry-over basis, i.e. the same basis the decedent had in the asset.  Thus, a sale of the asset may result in capital gains tax on the amount in excess of the carry-over basis.  However, the personal representative of the estate can allocate up to $1.3 million to the beneficiaries to step up the basis for assets passing to the beneficiaries.  In addition, up to a $3 million adjustment can be allocated to property that is Qualified Spousal Property.

If Congress does nothing, in 2011 the federal estate tax and generation skipping transfer tax are scheduled to return at $1 million with a 55% tax rate.  This means that for individuals with an estate valued at over $1 million their estate would owe federal estate tax at a rate of 55%.  It is surprising how easy it is for an estate to reach, and perhaps surpass, $1 million.  Should the exemption be limited to $1 million, many people will need to review, and likely update, their estate planning strategy to attempt to reduce or even avoid estate taxes.  As we do not know what Congress will do at this point, all we can do is wait for Congress to take action.  Additionally, in 2011 the carry-over basis is scheduled to be repealed and the step up in basis to return. 

So what can you do now?  It is very important to review the distribution sections of all wills and/or trusts to be sure that they continue to reflect the Testator’s (or Settlor’s in the event of a trust) intent.  Be particularly cautious if the estate plan depends upon a formula (as opposed to a specified dollar amount) to determine a beneficiary’s share.  If you have any concerns it is wise to speak to an attorney.  However, with the future being so uncertain, even changes made to an estate plan now, may need to be reviewed again after Congress has taken action, if it decides to take action at all, regarding the estate and generation skipping transfer taxes. 

We understand that this is confusing and may be frustrating.  If you have any questions regarding the above information or if you need assistance with your own estate plan, please feel free to contact our law firm at 517/886-7176.

Kristin D. Arnett, Attorney

THE HUBBARD LAW FIRM, P.C.