Now that 2009 has ended and Congress has not acted, there is no federal estate tax-for now at least. This development leads to a number of questions. Will Congress reenact the estate tax in 2010? If so, will it be reenacted retroactively to the beginning of 2010, or will it have prospective application? Or will Congress do nothing and allow the estate tax to return in 2011 with a vengeance at a $1 million exemption and a top rate of 55%?
There are a number of ways that Congress might address the estate tax this year. First, Congress may reinstate the estate tax retroactively to the beginning of 2010 at levels at or near 2009 levels, with a $3.5 million exemption and a top rate of 45%.
Another option would be to enact the estate tax sometime during the year with a prospective effective date, so that there would be no estate tax for a period of time during 2010, but with an estate tax instated at some time during the year. A variation on this might be that Congress would reinstate the estate tax in 2011 at 2009 levels.
Or Congress might do nothing and let the estate tax return in 2011 with a $1 million exemption and a 55% top rate. The bigger question is: What can be done while we are in this period of uncertainty?
What the rules say
Let’s review what the rules are for 2010:
o The estate tax and generation-skipping transfer taxes are repealed for 2010.
o The gift tax exemption is $1 million.
o The highest marginal gift tax rate is equal to 35%. If Congress reinstates the estate and generation-skipping transfer taxes retroactively to the beginning of 2010, the highest gift tax rate will rise as well.
o The step-up in basis rules are replaced by modified carry-over basis rules.
For 2011, the following rules are scheduled to come into effect if Congress does not act:
o The estate tax and gift tax exemption amounts will revert to $1 million.
o The generation-skipping transfer tax exemption will be something more than $1 million, based on inflation since 2003.
o The highest marginal estate and gift tax rate will be 55%, plus a 5% surcharge to phase out the benefit of the unified credit on estates with a value in excess of $10 million.
Not only should the federal estate tax be considered in planning, the advisor should also understand that 17 states have either an estate tax or an inheritance tax–or both. Most states rates are about 10%, but some rates are as high as 20%.
With states needing cash, more states may impose estate or inheritance taxes. Even if an individual is not a resident of a state that has an estate tax or an inheritance tax, if property is owned in one of these states, that property could be subject to the particular state’s estate or inheritance tax.
The more things change…
Some things do not change, even in the face of continual changes in the tax laws. One thing that will not change is that people will still die, and they will die unexpectedly. Young couples will want to protect their families in the event of such an unexpected loss. Businesses will still need to make plans to deal with the death, disability, or retirement of an owner or key employee. And families will still be interested in providing for children with special needs.