Repeal of Estate Tax in 2010
As of January 1, 2010, the estate tax has been repealed for the year 2010. A provision written into a 2001 Congressional act provided for this year-long repeal. Everyone assumed that estate tax would be reinstated in 2010, but Congress has not taken action to do this. It is still possible that Congress will reinstate the estate tax for 2010, and make the reinstatement retroactive.
The following is a summary of the current estate tax law:
- Both the estate tax and generation-skipping transfer tax (a tax on assets given to grandchildren) are repealed for the year 2010.
- Both taxes are scheduled to return in 2011 at rates that applied ten years ago. The amount that will be exempt from each of these taxes in 2011 will be $1 million. Unless Congress acts, the maximum estate tax rate will be 55% in 2011.
- If you give away more than $1 million during your lifetime, it will be subject to gift tax. The gift tax rate has been reduced from 45% to 35% for 2010.
- As a trade-off for the estate tax repeal in 2010, the law has changed with respect to the “cost-basis” of inherited property. In previous years, when the owner of property died, his or her property, including real estate and securities, received a new cost-basis equal to the value of the property at the date of death. Subject to certain exemptions, under the 2010 law, property you inherit from a person dying in 2010 will have the cost-basis of the person from whom it was inherited. Under the 2010 law, each estate can exempt $1.3 million of gains from this carry-over basis rule. Another $3 million exemption applies to gains in assets inherited from a spouse. The step-up in basis at death returns in 2011, and may return earlier if Congress acts.
If you have existing estate planning documents, it is important for you to contact an estate planning attorney to determine how the law in 2010 impacts your estate plan.
Formula clauses in trusts, which are usually used to create a bypass trust, have been based upon a minimum tax-free amount to be allocated to the trust. These clauses will be interpreted differently if there is no estate tax, and should be reviewed by an attorney. If you have appreciated assets, your estate plan should be reviewed to make sure your estate plan takes maximum advantage of the limited step-up in basis available in 2010.
