Marital Agreements

Federal Estate & Generation Skipping Taxes Have Been "Repealed" for 2010
…but there are some important points you need to know!

The repeal of federal estate and generation-skipping transfer ("GST") taxes has finally become a reality. However, such taxes are repealed only for one year--2010. On January 1, 2011, federal estate and Generation Skipping Taxes (GST) are resurrected with higher tax rates and lower exemptions than have been in effect during the last several years.

Also, the repeal of federal estate and GST taxes for 2010 may be short-lived. Congress may act to reinstate the federal estate and GST taxes sometime during 2010, and may even act to reinstate such taxes retroactively to January 1, 2010. Or, it may do nothing.

Here are some highlights of the current law:

l The federal estate and GST taxes are repealed, but only for estates of decedents dying during 2010 and transfers subject to GST tax occurring during 2010.

l The federal estate and GST taxes are currently scheduled to go back into effect on January 1, 2011, as they existed prior to 2001. The estate and GST tax exemptions will return to $1 million per person and the highest marginal estate tax rate will be 55%, with a 5% surcharge for estates between $10 million and $17.1 million in value.

l The way the income tax basis of property acquired from a decedent is determined has been dramatically changed. Under the law prior to 2010, a beneficiary's income tax basis in property received from a decedent was equal to the fair market value of the property on the date of the decedent's death. In 2010, a beneficiary's income tax basis in such property is equal to the lesser of (i) the decedent's basis in the property (a "carry-over" basis) or (ii) the fair market value of the property as of the decedent's date death.

l There are some provisions in the law for 2010 that will permit the carry-over basis of assets acquired from a decedent to be increased by up $3 million for property passing to a surviving spouse, and up to $1.3 million for property passing to anyone else. But, our understanding is that the decedent's estate will have to file an Estate Tax Return to claim these exemptions. In any event, any such increases may not cause the basis to exceed the fair market value of the property as of the decedent's date of death. (The bottom line,according to many observer's is the the number of Estate Tax Returns that will need to be filed for persons dying in 2010, a year in which the Estate Tax is Repealed, may be ten times as many as in 2009!)

l The federal gift tax has not been repealed, but the gift tax rate has been lowered to 35% for one year (2010, as compared to a 45% tax rate in 2009). The reduction of the gift tax rate to 35% along with the 1-year repeal of the GST tax may present significant planning opportunities (if Congress does not retroactively reinstate the GST tax) that we can discuss.

l No state estate or inheritance taxes have been repealed. (Colorado does not have an estate tax.)

As a result of all of these confusing changes, the repeal of the federal estate and GST taxes may result in severe distortions of a client's intended disposition of assets, especially for clients with formula-based provisions in their estate planning documents.

For example, assume a client has a $7 million estate, and an estate plan which provides that an amount equal to the client's estate tax exemption (which was $3.5 million in 2009) passes to a trust for the benefit of only the client's children, and the remainder passes outright to the surviving spouse. Because the estate tax has been repealed and there is no estate tax exemption amount in 2010, this plan could be interpreted to require that all $7 million passes to the children's trust, or that the client's entire estate passes outright to the surviving spouse. This may or may not be what the client intended, and an amendment to the client's estate plan may be necessary to preserve the client's intended disposition of assets.

Who Should Be Reviewing and Possibly Revising Their Estate Planning Now?

While the following are some common problem areas, the list is by no means exhaustive and should not be relied on as the sole reasons for reviewing your estate plans:

ü A client who has a greater probability of dying during 2010 or 2011;

ü A client whose estate plan leaves the estate or GST tax exemption amount to someone other than a trust primarily for that client's spouse's benefit;

ü A client who has an estate plan which divides assets between individuals and charities based on a formula;

ü A client who holds significant assets with a very low tax basis. (For example, assets acquired a long time ago that have appreciated over many years are likely to have a "low" basis);

ü A client in a second or later marriage who has minor or adult children from a prior marriage; and

ü A client who intends to make GST gifts to grandchildren or others determined by the amount of GST exemption available to the client at death.

Each client's plan is unique, and the impact of this repeal will differ from plan-to-plan. Therefore, I urge you to contact me to determine the impact of the temporary repeal of the federal estate and GST taxes, if any, on your estate plan. When we meet we can discuss making changes to your documents to maximize the tax benefits available should you die in 2010, while not otherwise disturbing your overall estate plan.

Remember: Although the federal estate and GST taxes have been repealed for 2010, states with estate or inheritance taxes have not repealed such taxes. Additional planning will be required to address the impact of state estate taxes for clients who own real or tangible property outside of Colorado or are residents of states other than Colorado. Colorado does not have an estate or inheritance tax.

This brief article is not a detailed outline of my views, planning suggestions or the law and is not intended as legal advice to any particular person. This article is intended to provide you with a brief summary of the current law, to advise you of the potential for additional legislation in 2010, and to alert you to the need to review your estate planning documents in light of the changes in the law.