January 2010
Practice Group(s):
Private Clients,
Trusts & Estates
Suspension of Federal Estate and
Generation-Skipping Transfer Taxes Now
in Effect
Due to Congressional inaction in 2009, a one-year suspension of the federal estate and generationskipping transfer (“GST”) taxes is now in effect. Although Congress may act this year to restore the
estate and GST taxes, the timing, substance and other details of any tax legislation are not now
predictable with any degree of certainty. Congress could reinstate the federal estate and GST taxes in
2010, either retroactively to January 1 (which the U.S. Supreme Court may block in whole or in part
as unconstitutional) or prospectively. Any reinstatement of the estate and GST taxes could be at rates
as they existed in 2009 ($3.5 million estate and GST tax exemptions, 45% top tax rate) or at new rates
(such as $5 million exemptions and 35% rate).
Federal Gift Tax
The federal gift tax remains in effect in 2010, with a $1 million per person lifetime exemption, a
$13,000 per donee annual exclusion and a top gift tax rate reduced from 45% to 35% (which, like
possible estate and GST tax legislation, could be replaced with retroactive effect).
“Carryover Basis” Regime
Another significant change for 2010 is the creation of a “carryover basis” regime for the purpose of
determining the tax basis of property acquired from a decedent. Under this rule, the basis for
determining gain or loss on the sale of capital assets acquired from a decedent will be equal to the
lower of
a. the decendent’s basis in such assets prior to death, and
b. the date of death fair market value of such assets (as opposed to simply the date of death fair
market value under prior law).
If property has appreciated in value during a decedent’s lifetime, this change will require an estate
beneficiary to pay capital gains tax on that appreciation when the property is sold. However, the
executor of an estate may allocate $1.3 million of basis to appreciated assets in all estates and an
additional $3 million to increase the basis of assets passing to a surviving spouse.
Looking Ahead to 2011
If the federal estate and GST taxes remain suspended for a full year with no further action by
Congress, these taxes return in 2011 at rates as they existed prior to the Economic Growth and Tax
Relief Reconciliation Act of 2001 (“2001 Tax Act”) with a $1 million estate tax exemption, a GST tax
exemption of $1,100,000 (indexed for inflation), and a 60% top estate tax rate. Additionally, in 2011,
the gift tax is scheduled to return to rates as they existed prior to the 2001 Tax Act ($1 million
exemption, 60% top rate). The carryover basis regime of 2010 would no longer apply to estate assets
in 2011.
Suspension of Federal Estate and Generation-Skipping
Transfer Taxes Now in Effect
You May Need to Take Action
Many estate plans and related documents were created with the assumption that a federal estate tax
and, in some cases, a GST tax, exist. An estate plan designed to take advantage of estate and GST tax
deductions, exemptions and credits may contain provisions that are defined or described with
reference to those taxes. As a result, the meaning of your current planning documents may be unclear,
or your plan may have unintended effects, if you die while there is no estate or GST or when the
exemptions or rates are very different from those anticipated when the plan was drafted. In addition,
your estate plan may not be designed to take full advantage of the $3.0 million basis increase allowed
to surviving spouses. On the other hand, if Congress takes no action on gift, estate and GST taxes in
2010, planning opportunities may exist.
Many people expect Congress to address these uncertainties this year, but even if Congress takes no
action, the problems generated by this unexpected development are of limited duration – one year, at
most, unless Congress enacts a permanent estate tax repeal. While immediate action may not be
warranted in all cases, we advise you to consult with your K&L Gates estate planning attorney
concerning the impact of the current law on your estate plan. Please call if you would like us to review
your plan, in light of current legislative developments or generally.
IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S.
federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and
cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or
recommending to another party any transaction or matter addressed herein.
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