Federal Estate Tax Temporarily Repealed

January 8, 2010

As of January 1, 2010, and for the first time since 1916, the United States has no federal estate tax.

Estate and GST Tax

In 2001, the Tax Relief Reconciliation Act provided for a one-year repeal in 2010 of the estate tax and the generation-skipping transfer tax (the "GST tax"). 1/ Contrary to popular expectations, Congress did not act to change these tax provisions by the end of 2009.  Consequently, the estate tax and the GST tax have now been repealed for 2010 only.

Congress may act to reinstate or change these transfer tax laws in the upcoming weeks or months of 2010.  Congressional leaders have indicated that such changes may be made retroactive to January 1, 2010.  However, the constitutionality of a retroactive reinstatement of the estate tax and GST tax is uncertain and likely will require judicial decision. 

If Congress does not act to change the law during 2010, the estate and GST taxes will return in 2011 with a $1,000,000 exemption and a maximum tax rate of 55%, essentially restoring the 2001 transfer tax laws.  This would represent a substantial tax increase over 2009 law, when the estate tax and GST tax exemptions were both $3,500,000 with a flat tax rate of 45%.

Gift Tax

While the estate tax and the GST tax have been temporarily repealed, the gift tax remains in place.  Taxable gifts made in 2010 where the donor will exceed or has exceeded the $1,000,000 lifetime exclusion are subject to a gift tax rate of 35%, a significant decrease from the 45% rate of 2009.  The annual gift tax exclusion – $13,000 per year per donee, or $26,000 for married couples – is not affected. 

Carry-Over Basis

Despite the repeal of estate and GST taxes, assets transferred on death during 2010 could be subject to more severe capital gains taxes and administrative costs.  Under the prior estate tax regime, property transferred at death received a "stepped-up" basis, meaning a beneficiary would receive a new basis equal to fair market value on the date of decedent's death.  However, "stepped-up" basis has now been replaced with "carry-over" basis.  As of January 1, 2010, a beneficiary takes property with a basis of the lower of (1) the decedent's basis in the property, or (2) the fair market value on the date of the decedent's death.  Thus, highly-appreciated inheritances will be subject to capital gains taxes if a beneficiary later sells the property.  However, an executor may increase the basis in assets that pass at death up to $1,300,000, and a surviving spouse may receive an additional $3,000,000 basis increase in inherited property, thus minimizing the impact of this law change for many estates.



Summary of Federal Transfer Taxes Under Current Law

Tax Rates (max.) 2009 2010 2011

Estate Tax

   45%    

None

55% 

GST Tax

45%

None

55%

Gift Tax

45%

35%

55%

Available Exemption 2009 2010 2011
Estate Tax $3,500,000 Unlimited $1,000,000
GST Tax $3,500,000 Unlimited $1,000,000
Gift Tax $13,000/year/donee*;
$1,000,000 additional
lifetime exclusion
$13,000/year/donee*;
$1,000,000 additional
lifetime exclusion
$13,000/year/donee*;
$1,000,000 additional
lifetime exclusion

*$26,000 for married couples

Conclusion

The law of federal transfer taxes is currently in a great deal of flux. Changes to any estate plan should be made only with the advice of counsel.  If you have questions regarding this Legal Update, please contact any attorney in Frost Brown Todd's Personal and Succession Planning Practice Group.


1/The GST tax is a tax on outright transfers to or transfers in trust for grandchildren or other persons more than 37 ½ years younger than the donor.  Essentially, Congress recognized that grandparents could leave large estates to their grandchildren rather than to their children, thus avoiding the payment of a second estate tax at the deaths of the children.  Historically, the GST tax has had a separate exemption approximately equal to the estate tax exemption, and the GST tax rate has been equal to the highest marginal estate tax rate.

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