Newsletter
Mar 30, 2010
No Estate Tax—What It May Mean For You
What Just Happened—Or Rather, Didn’t Happen?
Congressional inaction on the estate tax laws has resulted in a great deal of uncertainty, and many existing estate plans could be adversely affected.
The estate tax and the generation-skipping tax (“GST”) expired on January 1, 2010. It was widely expected that Congress would enact legislation to extend these taxes into 2010, but no such extension was passed. Consequently, under current law there is no estate tax on the estates of individuals who die in 2010, and no GST tax on transfers in 2010 from an individual to or in trust for his grandchildren or more remote descendants. The gift tax, however, is still in effect in 2010 at a 35% tax rate for transfers made during a taxpayer’s lifetime in excess of the $1 million lifetime exemption.
It is possible, perhaps even likely, that Congress will eventually reinstate the estate and GST taxes this year, and may attempt to apply them retroactively. If Congress fails to act on the estate and GST taxes this year, then as of January 1, 2011, both taxes return at the tax rates and exemption levels that were in effect in 2001. For a more detailed comparison of the estate, GST and gift tax laws for 2009, 2010 and beyond, see the chart on the reverse side of this Tax Alert.
How Could This Impact Estate Plans?
Many estate plans, particularly those for married couples, contain formulas intended to minimize estate taxes. These formulas are often structured to distribute the maximum amount that can pass free of the estate tax at a decedent’s death (sometimes referred to as the “tax-free amount”) to or in trust for specific individuals, which may or may not include the surviving spouse. The residue of the decedent’s estate then passes according to different provisions, and in some cases to different beneficiaries.
Under current law where there is no estate tax, the impact on an estate plan would depend on the particular language and formulas used. One possibility is that all of the decedent’s estate would pass as the “tax-free amount”, leaving nothing for the residuary beneficiaries. This could lead to an unintended and unfortunate result, such as in the case of a second marriage, or for wealthier families, where the beneficiaries of the “tax-free amount” might not include the decedent’s surviving spouse. It is also possible, depending on the terms of the document, that all of the decedent’s estate would pass to or in trust for the surviving spouse, and the beneficiaries of the “tax free amount” would receive nothing.
Likewise, many estate plans, particularly those for wealthier families, are designed to give the decedent’s grandchildren the maximum amount that can pass to them free of the GST tax. Under current law, there is no GST tax, so depending on how the gift to the grandchildren is worded, they may receive nothing, or they may receive the decedent’s entire estate.
What Should You Do?
We do not know when or if Congress will act to resolve these issues. In the meantime, we suggest your current estate planning documents be reviewed to determine whether the existing formulas operate as intended, or if they need to be revised. Members of the Seyfarth Shaw LLP Trusts & Estates Practice Group listed on the reverse side of this Tax Alert are available to answer any questions you may have regarding the current estate tax laws and their potential ramifications on your estate plan.
COMPARISON OF ESTATE, GST AND GIFT TAX RULES FOR 2009, 2010 AND BEYOND (UNDER CURRENT LAW) |
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2009 |
2010 |
2011 and thereafter |
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ESTATE TAX |
$3.5 million exemption with a maximum tax rate of 45%. |
Not in effect. |
Reinstated. $1.0 million exemption with a maximum tax rate of 55%. |
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GENERATION-SKIPPING TAX |
$3.5 million exemption with a flat tax rate of 45%. |
Not in effect. |
Reinstated. Exemption of approximately $1.3 million (adjusted for inflation) and a flat tax rate of 55%. |
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GIFT TAX |
Lifetime exemption of $1.0 million with a maximum tax rate of 45%. The annual exclusion was $13,000 per recipient. |
Remains in effect but with a lower maximum tax rate of 35%. The lifetime gift tax exemption is $1.0 million and the annual exclusion is $13,000 per recipient. |
Maximum tax rate increases to 55% and lifetime exemption remains at $1.0 million. Annual exclusion of $13,000 per recipient remains in effect, but could be adjusted for inflation. |
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BASIS RULES FOR INHERITED PROPERTY |
“Step Up Basis” rules apply. The basis of certain inherited assets in the hands of the recipient is the fair market value of the assets at the decedent’s death. |
“Carryover Basis” rules apply. The basis of inherited assets in the hands of the recipient is the lower of (1) the fair market value of such assets at the decedent’s death, or (2) the decedent’s income tax basis in such assets. Each estate is allowed $1.3 million of additional basis plus an extra $3.0 million of basis for assets passing to a surviving spouse, either outright or in a qualifying trust. |
“Step Up Basis” rules apply. The basis of certain inherited assets in the hands of the recipient is the fair market value of the assets at the decedent’s death. |
Members of the Trusts & Estates Group at Seyfarth Shaw LLP
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Chicago |
Los Angeles |
New York |
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Anne E. Brynn |
Patricia N. Chock |
DouglasAllen (212) 218-5549 |
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Kathleen E. Buchar |
Jeffrey P. Geida |
Christopher Lagno (212) 218-5250 |
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Geoffrey F. Grossman |
Mark T. Hansen |
Lawrence Mandelker (212) 218-5290 |
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H. Debra Levin |
Edward J. McCaffery |
William B. Norden |
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Steven R. Lifson |
Jadene M. Tamura |
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Stephen L. Schar |
Alan T. Yoshitake (213) 270-9696 |
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Ronald Schreiber (312) 460-5651 |
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For more information on our Trusts & Estates Group, please visit www.seyfarth.com/TrustsEstates.