December 2010 Estate Tax Update
- Executive Summary of 2010 Estate Tax Act (PDF file)
- Memorandum to clients regarding 2010 Estate Tax Act (PDF file)
January 1, 2010 Estate Tax Jolt
On January 1, 2010, the entire system of Federal Estate and Generation-Skipping Transfer Taxes was temporarily repealed (or maybe it wasn’t – more about that later). Under the 2001 Tax Act, the estate tax exclusion amount was increased in stages from $1 million in 2001 to $1.5 million in 2004 to $2 million in 2006 to $3.5 million in 2009 to repeal in 2010 followed by reinstatement at $1 million in 2011. It was widely expected that Congress would intervene and revise the law sometime between 2001 and 2009 to provide some certainty to the yo-yo effect of the 2001 Act. Unfortunately though, 2010 has arrived and that has not happened. Therefore, we are now still operating under the terms of the 2001 Tax Act and as of this writing there is now no Federal Estate or Generation Skipping Tax (though the Gift Tax rules and $1 million exemption remain in place).
Nobody can predict what Congress might do. However, there are a number of scenarios:
- Do Nothing. If Congress simply does nothing, which is always a possibility, the estate tax will remain dormant in 2010 and come back with full vengeance in 2011 under the pre-2001 Act rules. That is to say that there will be a $1 million dollar estate tax exemption with a top marginal rate of 55%. GST tax will also be reinstated at $1 million indexed for inflation since 2001 (possibly around $1.5 million). These exemptions and rates would remain in place unless later changed.
- Reinstate Estate Tax for 2010 Going Forward. Congress may reinstate the estate tax, effective on the date of introduction or passage. The exemption and rate could be anything, though the numbers usually floated are $3.5 million and 45% — the 2009 rules.
- Retroactively Reinstate Estate Tax for 2010. Congress may attempt to reinstate the estate tax, most likely at 2009 rates, and make it apply retroactively to January 1, 2010, as if estate tax repeal had never happened. Yes, this is possible. I’ll leave a detailed discussion of the constitutional issues raised by this for another day, but suffice to say that most commentators believe that this would be upheld, though it would certainly become subject to a prolonged legal challenges.
- Reinstate Estate Tax for 2011 Forward. Congress may allow the one-year lapse to remain but have the estate tax reinstated in 2011 at levels higher than the default levels provided in the 2001 Tax Act.
With such uncertainty, what should be done now? The first thing to do is to put an estate plan in place if you do not have one. Estate tax uncertainty is not a good reason not to have a plan. If you have executed documents in the past, especially if they are more than 2-3 years old, your plan should be reviewed to determine if any changes or adjustments are warranted. The best course of action may ultimately be to wait, but only by a thorough review of documents and each individual’s situation can the best result be achieved. Additionally, for some people, there may be some unique gift planning strategies for 2010, particularly relating to generation skipping transfers. Please contact us if you have any questions or to schedule an appointment to discuss your estate plan.
If any changes take place in 2010, we will use this page to provide you with timely updates and analysis.
The 2001 Tax Act (with 2006 to 2009 Updates)
On June 7, 2001, President Bush signed into law a broad-based tax cut that included major changes to the estate, gift and generation skipping tax laws. Among other changes, the new law increased the estate tax exemption to $1 million in 2002; $1.5 million in 2004; $2 million in 2006; and $3.5 million in 2009, leading up to complete repeal of estate taxes in 2010. Because of a quirk in the new law called the “sunset” provision, all of these provisions will expire on December 31, 2010, and the estate tax will reappear in 2011 with a $1 million exemption. Thus, under this new law, estate taxes are repealed for only one year! It is highly unlikely that this law will survive untouched until then. By passing this law, Congress has ensured that the estate tax debate will be revisited in the future. It is virtually impossible to predict the outcome of such debate under a different Congress, President, political climate and budgetary constraints.
Should I wait until the laws are clearer to create my estate plan?
No. The estate tax laws are designed to penalize procrastination. You should generally plan for the law that is currently in place, while providing as much flexibility as possible in your plan to deal with what amounts to a moving target.. In addition, non-tax considerations should not be put on hold indefinitely.
If I already have my plan in place, should I have an attorney review my existing plan?
Yes. With the exemption amounts increasing more rapidly than under the previous law, your plan may need to be revised. Estate plans should be periodically reviewed to determine whether it continues to meet your needs.
- Update: As of November, 2006, the changes under the 2001 Tax Act remain in place and prospects for changes in the very near future appear to be dim. Stay tuned!
- Update: As of August, 2007, the 2001 Tax Act remains the law of the land. Prospects for changes during the upcoming election season appear unlikely. The “flashpoint” for federal estate taxes occurs in 2009 when the exemption rise is followed by total repeal in 2010. Estate taxes appear likely to be a hot-button issue leading up to and in 2009, and appear unlikely to be substantially changed prior to 2009. State estate tax law changes are equally as unpredictable, yet critically important.
- Update: As of February, 2009, the 2001 Tax Act remains in place. It is almost certain that the future of the Federal Estate Tax will be a hot topic in 2009. Most analysts and commentators believe that Congress is likely to not allow the estate to expire in 2010 and will fix an exemption of somewhere between $3 to 5 million. Stay tuned!