Congress has left us with a mess when it comes to estate planning for 2010.
Remember this chart? Well, 2010 is now here. Most estate planning professionals fully expected Congress to do something before 2010 arrived, even if it was only to extend the 2009 federal estate tax laws into 2010. But Congress was so consumed with health care reform that it did not get to the estate tax before the Christmas break. So, as of January 1, 2010 there is NO estate tax.
2002 – 2003
2004 – 2005
2006 – 2008
N/A (estate tax repealed)
2011 and therafter
Note that this is not a permanent repeal. If Congress continues to do nothing, the estate tax comes back in 2011 with a $1 million exemption and a top tax rate of 55%.
Many believe that Congress will want as many tax dollars as possible to help pay for its spending programs and will act soon to reinstate the estate tax. But we don't know what Congress will do or when it will act. Here are some of the possible actions that Congress might take:
* Reinstate the 2009 estate tax laws, making them retroactive to January 1, 2010.
* Reinstate the 2009 estate tax laws for 2010 only, but not make them retroactive.
* Reinstate the 2009 estate tax laws and make them permanent.
* Pass extensive estate tax reform.
* Do nothing, and let the current law run its course. This means, in 2011, we would have a $1 million federal estate tax exemption and a top tax rate of 55%. By comparison, in 2009 we had a $3.5 million exemption and a top tax rate of 45%.
In the meantime, we have a new set of estate tax laws. What does this mean to you?
No Estate Tax
Your current estate plan may include some formulas to save the maximum in estate taxes, make charitable gifts, and provide for your spouse, family and friends. In 2010, when there is no estate tax or marital deduction, these provisions may not work properly. For example, if you have beneficiaries other than your spouse, the current wording in your plan could cause your spouse to receive fewer resources than you had intended. Also, some states have their own death or inheritance tax, so even though there is currently no federal estate tax, your estate may still be subject to a state tax.
Income Tax on Inherited Assets
The basis of an asset is the value used to determine gain or loss for income tax purposes when the asset is sold. Before January 1, 2010, assets that were inherited were automatically given a new “stepped-up basis” to full market value as of the date of the deceased owner's death. This saved the beneficiaries a substantial amount in income (capital gains) tax when the asset was sold.
Beginning January 1, 2010, the amount of assets that can receive a step-up in basis is limited. Assets that do not receive the stepped-up value will be taxed based on the deceased owner's original cost basis (what that owner paid for the asset). This means your beneficiaries could have to pay a considerable amount in income taxes when the assets are sold.
Most estates will be able to step up $1.3 million worth of assets. An additional $3 million of assets left directly to a surviving spouse can also be stepped-up. But there are some complicated hoops to jump through to make this happen.
Generation Skipping Transfer Tax Repealed (For One Year Only)
In addition to the estate tax, the generation skipping transfer tax was applied to assets that “skipped” the living parent (your child) and went directly to a grandchild. This tax was also repealed for 2010, but it is scheduled to come back in 2011 with an approximately $1.5 million exemption and a 55% tax rate. By comparison, in 2009 the GSTT exemption was $3.5 million and the top tax rate was 45%.
What Should You Do?
Now is the time to have your estate plan reviewed by your attorney. Remember, your plan needs to reflect the tax laws that are currently in effect. Some changes will probably need to be made to make sure your assets are distributed the way you want and to maximize income tax savings. And, depending on what Congress does or doesn't do this year, more changes may need to be made later.