Estate Tax Repeal. As you may have read, contrary to all expectations Congress has allowed the estate tax and the generation-skipping transfer tax (“GST tax”) to temporarily expire as of January 1, 2010. If Congress takes no further action, the estate and GST taxes will be reinstated effective January 1, 2011, with lower exemptions and higher rates. The gift tax remains in effect throughout, although the rates are lower in 2010. It seems likely that Congress will attempt to reinstate the estate and GST taxes retroactively to January 1, 2010. However, it is also possible that the taxes will be prospectively reinstated or that Congressional gridlock will result in a temporary repeal for 2010 followed by reinstatement in 2011 under current law. There may also be constitutional challenges to a retroactive reinstatement of the taxes. Permanent repeal continues to appear highly unlikely. Currently, there is a great deal of uncertainty regarding the tax treatment of estates of people who die during 2010.
Do You Need to Make Any Changes to Your Estate Plan? If you were to die while the repeal of the estate and GST tax is in effect, and if the taxes are not successfully reinstated on a retroactive basis, the funding formulas under your estate plan may not operate as intended. For instance, the allocation of assets among the beneficiaries of your estate plan and the determination of whether assets will pass outright or in trust to a surviving spouse may be affected. Additionally, bequests to GST trusts may not be funded. In some but not all cases it may be possible to achieve the intended effect through the use of disclaimers or distributions from trusts.
Since any problem would only arise if you were to die while repeal is in effect and if the taxes are not retroactively reinstated, you may wish to wait and see what action Congress takes before making any changes to your estate plan. Alternatively, we can draft a trust amendment that would provide that in this limited situation, the various outright bequests and/or trusts under your plan should be funded as if the 2009 rules and exemption amounts were still in effect. This would be a temporary provision to ensure that your assets would be distributed as originally intended, although the tax consequences for all estates remain unclear until Congress reconvenes and either acts or fails to act to reinstate the estate tax. If you would like us to prepare such an amendment or would like to discuss how your individual estate plan is affected, please contact us as soon as possible.
Future Steps. We will closely track further developments in this area and will keep you informed. We can revisit your estate plan in more detail, if necessary, once it becomes clear what the estate tax system will be going forward. Given the fact that permanent repeal is unlikely and that the status of the estate tax system for 2010 and future years is still uncertain, we do not recommend revising estate plans in a broader way at this time to more fully address estate tax repeal or the “carryover basis” system that is scheduled to replace it.
Planning Opportunities for Risk-Takers. There may be opportunities to make GST-tax free gifts and/or gifts at a lower gift tax rate this year, but such gifts may not save taxes if Congress successfully reinstates the current tax regime retroactively. We do not in general advise making major transfers in reliance on repeal unless you are willing to run the risk of reinstated taxes being imposed, but if you were thinking of making significant gifts anyway or if you would like to fully utilize your $1 million lifetime gift tax exemption amount, we can discuss whether this might be a good time to do so.
Mary-Kathleen O'ConnellPartnerCo-Chair, Trusts & Estate Planning
Susan L. AbbottPartnerChair, Tax Exempt Organizations, Co-Chair, Trusts & Estate Planning