January 20, 2010
As has been widely reported, the Federal Estate Tax and Generation-Skipping Tax expired on January 1, 2010. If Congress fails to act to make a change during 2010, the federal estate exemption will be restored at the level of $1,000,000 as of January 1, 2011.
While we wait to see if and when Congress acts, we have the following observations for your consideration:
1. Existing Plan for Married Couples. Many of the wills and revocable trusts drafted in the past for married couples have provisions with a formula for division of assets between a marital trust (Trust A) and a credit shelter trust (Trust B) upon the death of the first spouse. These plans use formulas referring to estate tax terms or generation-skipping tax terms which no longer exist. The repeal of these provisions could impact your intended plan if a death occurs in 2010.
2. Charitable Planning. If your estate plan includes any charitable gifts involving tax formulas, then you should review your documents to see if revisions or clarification needs to be made.
3. Generation-Skipping Trusts and Allocations. If you have been making transfers to a trust for grandchildren for which you have been allocating generation-skipping exemption, you may want to consult with us before you make additional transfers.
4. Gift Tax. The gift tax rate drops to 35% but making taxable gifts during this period of no estate tax could be risky. The lifetime gift exemption remains at $1,000,000, and the annual exclusion amount for tax-free gifts is $13,000 per person.
5. Maintain all tax records. The current law requires what is known as “carry- over basis” if a death occurs during 2010. This means that your heirs would not receive a stepped-up basis to the value at date of death. Instead the heirs would need to determine the original income tax basis for all assets of a decedent dying during 2010. Historical records will be very important. There are some exceptions which will involve allocating a limited amount of stepped-up basis, and this will require careful planning if a death occurs in 2010.
6. Personal Factors. Your personal, financial and family situation, including age, and/or health considerations, will likely affect whether you should make any changes to your existing estate plan based on the current uncertainty about the tax law.
This letter focuses on the points which will affect the majority of taxpayers and does not attempt to address specifics or technical matters. If you would like for us to review the provisions of your documents or if you have questions, please contact us so we may consult with you on an individual basis.
If and when new legislation is passed, an updated report will be posted here.
This document is provided by Crowe & Dunlevy, P.C. for educational and informational purposes only and is not intended and should not be construed as legal advice.