Private Clients Alert
January 2010
For more information, please contact
your K&L Gates Private Clients
lawyer.
K&L Gates is a global law firm with
lawyers in 33 offices located in North
America, Europe, Asia and the Middle
East, and represents numerous GLOBAL
500, FORTUNE 100, and FTSE 100
corporations, in addition to growth and
middle market companies,
entrepreneurs, capital market
participants and public sector entities.
For more information, visit
www.klgates.com.
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 generation-skipping 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
(i) the decedent’s basis in such assets prior to death, and
(ii) 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
Private Clients Alert
exemption, 60% top rate). The carryover basis
regime of 2010 would no longer apply to estate
assets in 2011.
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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K&L Gates is a global law firm with lawyers in 33 offices located in North America, Europe, Asia and the Middle East, and represents numerous
GLOBAL 500, FORTUNE 100, and FTSE 100 corporations, in addition to growth and middle market companies, entrepreneurs, capital market
participants and public sector entities. For more information, visit www.klgates.com.
K&L Gates comprises multiple affiliated partnerships: a limited liability partnership with the full name K&L Gates LLP qualified in Delaware and
maintaining offices throughout the United States, in Berlin and Frankfurt, Germany, in Beijing (K&L Gates LLP Beijing Representative Office), in
Dubai, U.A.E., in Shanghai (K&L Gates LLP Shanghai Representative Office), and in Singapore; a limited liability partnership (also named K&L
Gates LLP) incorporated in England and maintaining offices in London and Paris; a Taiwan general partnership (K&L Gates) maintaining an office in
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registrations in the jurisdictions in which its offices are located. A list of the partners in each entity is available for inspection at any K&L Gates office.
This publication is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon
in regard to any particular facts or circumstances without first consulting a lawyer.
©2010 K&L Gates LLP. All Rights Reserved.
January 2010
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