Federal Estate and Generation-Skipping Transfer Taxes Repealed -- Review of Estate Plans Recommended
On January 1, 2010, the federal estate and generation-skipping transfer taxes were repealed for one year until January 1, 2011, due to Congress’ inability to act before the end of 2009. During the period of repeal, the federal gift tax remains in effect at the rate of 35% on taxable gifts in excess of the $1,000,000 exemption. Please note that the New Jersey and New York wealth transfer taxes remain in effect during 2010.
Congress may reinstate both the federal estate and generation-skipping transfer taxes at some point in 2010. It is unclear, however, whether Congress would reinstate these taxes retroactive to January 1, 2010. In addition, it is not yet known if the reinstated federal estate and generation-skipping transfer taxes would continue to have an exemption of $3,500,000 for each and a maximum tax rate of 45%, which were applicable in 2009. If Congress again fails to act in 2010, the estate and generation-skipping transfer taxes will be reinstated on January 1, 2011 with a $1,000,000 applicable exclusion amount and a $1,000,000 generation-skipping transfer tax exemption (subject to adjustment for inflation since 1999); the maximum tax rate for the estate, gift and generation-skipping transfer taxes will be 55%, with a 5% surcharge applicable to gifts and/or estates between $10,000,000 and $17,184,000.
The consensus among tax and estate planning professionals was that Congress would act before the end of 2009 to prevent the repeal of the federal estate and generation-skipping transfer taxes. Accordingly, most tax professionals felt it was not necessary for clients to review their estate planning documents before the end of 2009. Unfortunately, Congress did not act. As a result, it is important that you are aware of the potential impact the repeal of the federal estate and generation-skipping transfer taxes may have on your current estate plan.
If you pass away in 2010, before new legislation is enacted or in the event such legislation is not enacted retroactive to January 1, 2010, your current estate plan may be affected as follows:
1. Your estate planning documents may contain formulas that use phrases or defined terms, such as the “estate tax exemption amount,” that are not in effect during 2010. This language is typical in a Will or Revocable Trust for married persons that creates a (i) “credit shelter" trust and (ii) marital trust or outright bequest. Although the potential effect of the repeal on your estate plan requires an individual analysis, examples of the potentially unintended results include: (a) funding of trusts for the benefit of your children to the exclusion of your surviving spouse, and (b) funding of trusts for the benefit of your grandchildren to the exclusion of your children. Thus, a review of your documents should be completed to determine whether revisions are necessary to avoid an unintended disposition of your assets.
2. In addition, during repeal there is no automatic step-up in basis for inherited assets. During 2010, the basis of inherited assets remains the same as the decedent’s basis in the assets, with the following exceptions: (i) up to $1,300,000 of basis may be allocated to appreciated assets passing to beneficiaries; and (ii) an additional $3,000,000 of basis may be allocated to appreciated assets passing to the decedent’s spouse. Revisions to your current estate plan may be necessary to fully utilize the additional $3,000,000 of basis increase.
The repeal of the federal estate and generation-skipping transfer taxes may also provide planning opportunities for clients in 2010. Clients who anticipate making taxable gifts may wish to take advantage of the currently reduced rate. In addition, it may be possible to make gifts to grandchildren without the imposition of the generation-skipping transfer tax.
We believe that the potential effect of the repeal of the federal estate and generation-skipping transfer taxes can be eliminated by the execution of a simple codicil to your Will and/or an amendment to your Revocable Trust. We recommend that you contact a member of our Tax, Trusts and Estates Group to discuss the effect of the repeal of the federal estate and generation-skipping transfer taxes on your current estate planning documents and the potential planning opportunities that may be available to you.
We will continue to keep you updated as developments occur in this important area of law.
Tax, Trusts and Estates Group at Wolff & Samson PC:
David L. Schlossberg
Member of the Firm
Phone (973) 530-2010
Sean M. Aylward
Member of the Firm
Phone (973) 530-2105
Roxanna E. Hammett
Member of the Firm
Phone (973) 530-2039
Carl B. Levy
Phone (973) 530-2035
Phone (973) 530-2062
Shannon L. Keim
Phone (973) 530-2084
Farah N. Homsi
Phone (973) 530-2044