It appears that Congress will adjourn without reaching an agreement on transfer tax legislation culminating in a messy situation for those trying to plan their estates. Estate and generation-skipping transfer taxes (GST) will be repealed for one year beginning January 1. The one-year repeal results from provisions in the 2001 tax act that reduced estate and GST taxes from 2001 through 2009, ending in complete repeal in 2010. The provisions in the 2001 act are scheduled to “sunset” in 2011, meaning that 2001 provisions cease to be effective and the pre-2001 estate and GST tax rates and exemptions return to pre-2001 levels on January 1, 2011. Unless Congress takes further action by year-end, as of January 1, 2010, the law will be as follows:
- Repeal of federal estate and GST taxes;
- A 35% gift tax rate and a $1 million lifetime gift tax exemption;
- State death taxes may continue to apply depending on state of domicile;
- Limitation of the step-up of tax basis for income tax purposes of an estate’s assets to $1.3 million (plus $3 million for surviving spouses); otherwise, a “carryover” basis regime will be in effect; and
- Estate, GST and gift tax rates are each scheduled to return to 55% in 2011 with a $1 million exemption (the GST exemption is indexed for inflation).
Estate tax repeal may cause results that contradict a person’s intent. As an example, surviving spouses may find their expected inheritances largely reduced, or even eliminated due to formula funding clauses in their existing estate plans. Congressional leaders have publicly stated that they plan to enact legislation early next year that would retroactively reinstate transfer taxes from January 1, 2010, a tactic that is likely to be challenged on constitutional grounds. In the meantime, its a good idea to review your estate plan with your attorney to determine whether any temporary fixes are necessary to avoid uninteded results.