Most estate planning advisors believed Congress would enact legislation prior to 2010 to avoid the disappearance of the federal estate tax. Those of us sharing this belief have been proved wrong, as we enter 2010 with no estate tax, at least for this year. In 2011, the estate tax returns with only a $1 million exemption amount and a 55% tax rate.
Besides the prospect of a 2011 meager $1 million exemption amount, the uncertainty and complication of current law balances, in part, the advantages of no estate tax. Right now, the law includes these rules:
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there is still a $1 million exemption on gifts, however, the gift tax rate is reduced to 35%.
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although there is no estate tax, there is an income tax that can apply on inherited assets because there is no "step-up" in basis, as under prior law. Along with a carryover basis to inherited assets, there is a $1.3 million tax exemption, and a $3 million marital exemption. Thus, assets sold at a gain over these amounts will be taxed at ordinary or capital gain rates.
The sophisticated planning options under the 2010 law are now being analyzed and considered. However, some basic questions, and speculated answers (with the emphasis on speculation) are the following:
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Will Congress reinstate the estate tax in 2010? Probably. There is too much tax revenue at stake, not to mention the chaos the law is creating. Further, there is a need to address the $1 million exemption amount returning in 2011. This provides an incentive for all members of Congress to compromise on an exemption amount - those members who believe there should not be an estate tax and those members who believe virtually all "wealthy" people should pay some estate tax.
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Assuming Congress addresses the estate tax in early 2010, which is what is expected, is the exemption amount $3.5 million or as much as $5 million? Again, nobody knows, but these are the range of exemption amounts widely discussed. Assuming there is Congressional action, it is virtually certain the new exemption amount will exceed $1 million.
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What if you die before the estate tax is reinstated - is it constitutional to apply the tax retroactively? Nobody knows because there is precedent to support that Congress can and cannot enact laws applying taxes retroactively. Assuming there are wealthy people dieing prior to any 2010 legislation, this constitutional issue will likely be answered by the Supreme Court.
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Is it possible nothing is done all year and the exemption amount is only $1 million in 2011? As suggested above, this is possible but not likely. But then again, not many of us saw this mess continuing into 2010 so who can say.
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Most importantly, what is a client to do? There obviously is not one answer. Much depends on your existing plan and your objectives. It is likely you will want to consult with your estate planning counsel. For example, consider this scenario:
Dad and Mom have a common estate plan that provides, upon the first death, the surviving spouse receives all assets necessary to eliminate estate tax at the first death. The balance of the assets pass to children. In the past, this clause may leave all but $1 million, or $2 million, or even $3.5 million, to the surviving spouse. Now, under this clause, the surviving spouse would be disinherited. Conversely, Dad and Mom may deliberately leave all assets to the children while there is no estate tax (and future generations because there also is no generation skipping tax) because they are confident the children will take care of the surviving parent. Or, you could leave the surviving spouse a small amount, such as $1 million since you believe the exemption amount will always be at least $1 million, and the balance to a GST Trust for your children and future generation.
Congress has provided us with much to consider.
