Topics of Interest

Federal Estate Tax: The Temporary Suspension in 2010 and Then What in 2011?

Due to the failure by Congress to modify the sunset provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the Federal Estate Tax and the Generation Skipping Tax were temporarily suspended from January 1, 2010 until December 31, 2010.  On January 1, 2011, the Federal Estate, Gift and Generation Skipping Tax system will revert to the system in place prior to the enactment of EGTRRA.  The primary reason that Congress has failed to act, is a combination of a focus on other issues (Healthcare Reform), and a lack of consensus on the taxing threshold and tax rate. We are, therefore, in this unfortunate standstill which complicates Estate Planning.

This year, and this year only, the assets of a decedent are transferred free from any Federal Estate Tax, but State Estate Tax remains in force.  However, these assets are transferred pursuant to a “modified carryover basis” rule so that the tax basis on capital assets is no longer automatically stepped-up to the date-of-death value.  Instead, the surviving spouse and other beneficiaries are allowed a limited step-up in value, which the Executor of the Estate must assign to each asset by submitting a required report (instead of a Federal Estate Tax Return) to the government.  If procedures are not strictly followed, there are serious penalties that can be enforced against the Executor personally.

Unless Congress steps forward and can successfully pass legislation reforming the Federal Estate Tax system by January 1, 2011, the Federal Estate, Gift, and Generation Skipping Tax rules will return to the rules existing prior to the enactment of EGTRRA (as if the legislation never existed at all).  This means that:

  1. The Federal Estate Tax exemption will be $1 million
  2. The General Skipping Tax exemption will drop to $1 million (adjusted for inflation going forward)
  3. The top Estate, Gift, and General Skipping Tax rates will increase to 55% (60% for estate and gift tax transfers between $10 million and $17.184 million)

Planning is obviously complicated because of the uncertainty of what will happen
by the end of 2010.  Will Congress be able to pass legislation and if so what will the reformed Tax Law mandate?  Estate Planning professionals cannot predict the actions of Congress.  The general obstacle right now is getting both houses to join together to agree on legislation that will reform the Federal Estate and Gift Tax system.

Although planning is currently more complicated, it is not impossible.  There are a variety of techniques available to accommodate this time of uncertainty.  Scheduling a free consultation with your professional estate planner to review existing documents is advisable to ensure that the documents will perform as anticipated in light of 2010 and 2011 rules.  There are also planning opportunities available for which now is an ideal time to act.  For instance, if a client is interested in making large lifetime gifts (money, real estate, business interests for example) the gift tax rate above the $1 million lifetime exemption is currently 35%.  However in 2011 (unless there is a Tax reform) the gift tax rate will be 45%.

As professionals in Estate Planning, Schanker and Hochberg P.C. have always advocated regular reviews of existing planning, to ensure planning is current and appropriate.  For more information, please contact Andrea B. Schanker, Esq. at 631 424-5400 or andrea@schankerhochberg.com.

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