Boardman Law Firm

Status of the Estate Tax: 2010 and After

Congress concluded its 2009 session without extending the federal estate tax. The result is unprecedented confusion for planners and clients alike.

In particular, if you have a "formula clause" in your estate planning documents, or if you signed your estate planning documents more than five years ago, please contact us as soon as possible to have your documents reviewed.

Under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the failure of Congress to act results in a repeal of the federal estate tax and generation-skipping transfer tax for calendar year 2010. However, these same taxes are reinstated on January 1, 2011, with the rules, rates, and exemptions in effect before 2002. Below, we include a chart of exemptions and rates under EGTRRA.

Given the failure of Congress to act, the status of the estate tax is dramatically uncertain. This confusion is unprecedented.

Status of the Estate Tax: 2010 and After

2010. Unless Congress acts during the year to change the law, the following rules will apply in 2010:

• Estate Tax. The federal estate tax will not be imposed on the estates of decedents dying in 2010.
• Generation-Skipping Transfer (GST) Tax. The GST tax will not be imposed in 2010.
• Gift Tax. The federal gift tax remains in effect with a $1 million lifetime exemption and a 35% marginal tax rate. The annual gift tax exclusion remains at $13,000.
• Carryover Basis. Assets held by a decedent dying in 2010 do not receive an adjustment in income tax basis to date-of-death value. Rather, such assets receive a carryover basis (their historic basis before the date of death) or retain their basis as of date of death if it is less.

The estate of each decedent dying in 2010 will be allowed to allocate to specific assets additional basis of up to $1.3 million. In addition, the basis of property transferred to a surviving spouse or to certain marital trusts may be increased by up to $3 million.

2011 and After. Unless Congress acts during 2010 to change the law, the following rules will apply in 2011 and after:

• Estate Tax. The federal estate tax will be imposed on estates of decedents that exceed $1 million in value. The top marginal tax rate will be 55% (60% in the case of certain large estates).
• Generation-Skipping Transfer Tax. The GST tax will be imposed with a 55% rate and a $1 million exemption, indexed for inflation.
• Gift Tax. The federal gift tax will remain in effect with a $1 million lifetime exemption but now with a 55% marginal tax rate.
• Basis Adjustment. Assets held by a decedent dying after December 31, 2010, receive a basis adjustment upon the decedent's death. Carryover basis is no longer in effect.

Retroactive Changes in 2010. Congress may act to reinstate the estate and GST taxes retroactively in 2010. Retroactive action may be open to constitutional challenges.

State Estate Tax Law - Wisconsin. Wisconsin currently imposes no estate tax. However, if the federal estate tax is reinstated in 2011, Wisconsin will impose an estate tax on federally taxable estates equal to the federal credit for state death taxes. If you hold property subject to the tax law of another state, you will have to determine whether or not that state imposes an estate tax and, if so, how that estate tax may affect you.

Interim Planning. The situation is dramatically uncertain. Given this uncertainty, we continue to monitor the situation and to review estate plans with clients. The following are some general observations:

• Review. In general, we advise that clients have their estate plans reviewed at least every five years. In light of current uncertainties, we think that this is an appropriate time to review older estate plans.
• Formula Clauses. Many larger estates employ formula clauses to fund trusts or other bequests. Because such formula clauses are tied to transfer tax provisions in the Internal Revenue Code not in effect in 2010, their meaning is uncertain, and they could have unintended results. We advise all of our clients with formula clauses in their estate planning documents to have their documents reviewed as soon as possible. If you have a question about whether or not your planning documents use a formula, please let us know.
• Estates over $1 Million. The estate tax is scheduled to return in 2011, with an individual applicable exclusion amount of $1 million. Therefore, for deaths in 2011 and after, estates worth more than $1 million are potentially exposed to estate tax.

For many married couples, it has been our practice to draft disclaimer plans, which give the surviving spouse the option of funding a family trust for purposes of minimizing or eliminating the estate tax. In this environment, the disclaimer plan provides welcome flexibility, and as a general rule, we do not advise major changes in existing disclaimer plans. However, we may be able to draft for greater flexibility, for those clients who want it, in existing disclaimer plans.

Clients may also want to modify their estate planning documents to provide administrative provisions tailored to apply in the current situation. For example, it may be prudent to authorize the personal representatives or trustees to allocate additional basis under 2010 law.

• Marital Property. In the current uncertain situation, spouses who hold marital property under Wisconsin law may have an advantage. Generally, under marital property, only half of a married couple's assets is exposed to the uncertainties of the current estate tax regime on the death of the first spouse to die. Marital property may also have some advantages over common law property in the allocation of income tax basis following the death of a spouse.

Transfer Tax Exemptions, Top Marginal Rates and State Death Tax Credit Under The Economic Growth and Tax Relief Reconciliation Act of 2001

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This legal update is not legal advice. Individuals should seek advice based on their particular circumstances from their own counsel.

IRS CIRCULAR 230 NOTICE: To ensure our compliance with certain U.S. Treasury Regulations, please be advised that, unless expressly indicated otherwise, if this communication or any attachment to this communication contains advice relating to any Federal tax issue, the advice is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding Federal tax penalties. If any of the advice was written to support the promotion, marketing, or recommendation of any transaction or matter addressed within the meaning of Internal Revenue Service Circular 230, you should seek advice based upon your particular circumstances from an independent tax advisor.