Status of Estate Tax in U.S.

12/17/2010 - The income, estate, & gift taxes have been modified for 2010, 2011 & 2012. For more information, click here.

Most of us thought it would never happen.  The estate and generation skipping taxes have gone away as of January 1, 2010, albeit for only one year.  However, before you get too excited about this one year "window of opportunity" (if one considers dying soon without estate tax an opportunity), you should be aware that Congress’ failure to act to either "repeal the repeal" or to make it permanent doesn’t mean Congress won’t take action to close the window during 2010 or even to change the law retroactively to make it as though the window had never opened.  There is good reason to believe that sometime during 2010 Congress will pass legislation to reinstate the estate and generation skipping taxes in some form. If Congress does act, it may make the legislation effective as of the date of enactment or some other date, including a date as early as January 1, 2010.  Congressional action could either extend the 2009 tax rates and exemptions or it could enact new rates and exemptions, or it could permanently repeal the estate and generation skipping taxes, the latter appearing very improbably.

If Congress remains deadlocked and does nothing during 2010 the estate, gift and generation skipping taxes as they existed before 2001 will be reinstated in 2011 with a 55% maximum rate (plus a 5% surcharge on large estates and gifts), a $1 million exemption for lifetime and death transfers, and a $1 million generation skipping exemption.  The exemptions would be adjusted for inflation since 1999.  This would be a huge step backward along the path of reduced estate and gift taxes that led to the repeal in 2001.  In 2009 the maximum estate and gift tax rate was 45%, the gift tax exemption was $1 million, the estate tax exemption was $3.5 million (which included the gift tax exemption) and the generation skipping tax exemption was $3.5 million.

This uncertain environment can present opportunities, but with those opportunities come some inherent risks.  An individual could make taxable gifts in 2010 and pay less gift tax because of the 35% rate and/or transfer assets to grandchildren because the generation skipping tax is repealed, but depending on how and when Congress acts that could be either beneficial or detrimental.  If Congress enacts legislation retroactively to January 1, 2010 and the retroactivity withstands constitutional challenge, the gift tax rate on such gifts could be 45% or higher, rather than the expected 35% and transfers to grandchildren thought to be free of generation skipping tax could end up being taxed at whatever rate Congress decides.  Even death before Congress acts would provide no certainty as to taxation of the estate.

Because it is impossible to predict what Congress will do, any estate planning must be done with caution, especially if it is designed to capture a perceived opportunity arising out of these unique circumstances.  On the other hand, there are things that should be done to assure that an unintended result or document ambiguity doesn’t arise as a result of a death in 2010.  Because much estate planning is designed around and makes reference to various provisions of the estate tax law, because there is now no “estate tax law” until either Congress acts or 2011 arrives, provisions in estate planning documents that use references to the estate tax law in directing the disposition of the estate may cause confusion at a minimum and uncertainty, discord and even a different result than was intended.

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