No Estate Tax for 2010: Real or Not?

Last week at lunch with a tax attorney associate, I posed the question, “The phone must be ringing off the wall from client inquiries about their respective wills and trust?" The attorney replied, "Not yet! Adding, if Congress does not amend the estate tax provisions, and retroact the provision to the first of the year, I will be real busy, revising wills and trusts with the AB provision." Hopefully, this will get the pot stirring when you read this article, leading you to contact your estate attorney or our firm to discuss the following article and its implications to your family and you.

A quick history of estate tax:

For 2009, the estate was free from tax for estates of 3.5 million or less. For estates greater than 3.5 million, the tax was 45% of the amount over 3.5 million. For a husband and wife using the standard AB bypass provisions for a will or living trust, the provision enabled 7 million to be passed to the heirs without estate tax, on the death of both husband and wife. Upon the death of the first spouse, the marital provision of the will or trust would absorb any amount above the 3.5 million amount, thus no tax was due from the first spouse to die, thus any tax due would be due on the second spouse death. Further, the surviving spouse and heirs enjoyed a step up to fair market values in the assets passing to them through the marital and bypass trust, or outright to the heirs, in certain instances, i.e. life insurance proceeds, annuities, joint property, etc.

For estates of 7 million and less with a husband and wife, no estate would be due and the value of the estate assets would pass to the heirs, i.e. children, etc., tax-free with a new fair market value at the date of death if the assets were later sold for income tax purposes. This was a great tax benefit! Think of the estate distribution provisions. If the B bypass trust is written to receive all the estate tax free assets, which used to be 3.5 million and is now unlimited, it passes to the kids or grandkids and leaves the surviving spouse out of the distribution, except for the income interest. I am sure upon reading this article, the spouse who expects to be the survivor will want to do away with the AB trust provision and have all assets left only to the surviving spouse, sounds like a lot of wills and trust amendments to be done, if this law stays in effect for 2010.

In the Fall of 2009, and pondering the estate tax rules for 2010, most tax attorneys working with the Bell firm thought that the 2009 rules would stay in effect for 2010 and thereafter, following congressional amendment to the existing law. This amendment did not happen. Think of the lawsuits that will be filed if Congress retroacts this bill to January 1, 2010, and someone has died with a taxable estate over 3.5 million in the interim and the IRS does not allow the estate to pass tax free!

The 2001 tax act which was a 10-year sunset law remains in effect, therefore for 2010, there is no estate tax. I repeat, for 2010, there is no estate tax.

Furthermore, for grandparents, there is no generation skipping tax to consider for 2010. The caveat is that the heirs do not have to pay estate tax, but they receive a limited step up basis in the inherited assets of only 1.3 million. Think of the nightmares this will be for accountants and financial advisors in keeping up with the cost basis of assets passed on from parent to child or grandchild!

For all who plan on making gifts to children, grandchildren, etc., the annual gift exemption amount is $13,000. For annual amounts above the $13,000 amount per person, allows for a life time gift amount of $1 million per person, and the tax rate is 35 percent, for amounts over 1million of cumulative gifts made to all persons. Think of the planning: a parent could gift property at 35% in 2010, and the same property would be taxed at 55% in 2011, when the 2010 law sunsets and the estate rules revert back to 1 million, as noted below.

For 2011, the “no estate tax” for 2010 reverts back to the law for prior 2001 estate tax law, or an estate tax of 55% for estates greater than 1 million, which would be quite onerous but would allow for step up in estate values. What a swing from a no tax to a burdensome tax only one year later!

I hope I have the pot stirring about what scenarios of what-ifs and estate planning to be done. Contact your attorney or give me a call if we can help!