Jan 15, 2010

Estate Tax Eliminated for 2010

The Estate Planning and Wealth Protection Group at Smith, Gambrell & Russell, LLP is writing to provide you with an important tax alert. As you may have heard, Congress failed to act at the end of 2009 to deal with the expiration of certain laws that impact estate taxes. Thus, the federal estate tax and the generation-skipping transfer tax have been repealed for individuals dying during 2010 (although some states like New York, New Jersey and Connecticut will retain independent estate tax systems), and the stepped-up basis rule has been replaced by a carry-over basis rule. While that may appear to be the proverbial “good news,” the bad news is that many of our clients will need to modify their estate planning documents.


For many years, most married clients adopted a popular estate plan which divides the estate of the first spouse to die into two portions or shares. One share equals the deceased spouse’s unused estate tax exemption, which last year was $3,500,000 (the “Family Share”). The other share equals the “optimum” marital deduction, which in most cases is the remainder of the estate (the “Marital Share”). Neither share was subject to federal estate tax when the first spouse died. For federal tax purposes, the Family Share escaped estate taxation in both spouses’ estates. The assets remaining in the Marital Share were subject to estate taxes on the death of the surviving spouse.

Because of Congress’s inaction, there may be widespread uncertainty as to how the provisions of your estate planning documents will be interpreted.


A “wait and see” approach is unattractive because many of our clients have a Will (or trust) which creates Marital and Family Shares, and the amounts to be distributed to each share are calculated based upon a formula which, in turn, is based upon the estate tax exemption that exists on the date of death. If there is no estate tax law in effect on the date of death, it is difficult to calculate the amount that goes into each of these shares. This and other ambiguities may distort the distribution of your estate to your beneficiaries.

The confusion does not end there. Many influential members of Congress have stated that they intend to pass a statute in 2010 that would reinstate some version of the estate and GST tax law, as well as reinstate the stepped-up basis rules, all to be effective as of January 1, 2010. Whether such a retroactive act is constitutional is somewhat in doubt. However, if its constitutionality is challenged, it may take years before the U.S. Supreme Court clarifies the constitutionality of the retroactive application of such a statute. Extended congressional inaction is another real possibility.


Another change that took effect this year relates to the income tax basis of inherited assets. Under prior law, the income tax basis of an asset was changed to its value (“step-up”) when its owner died. For 2010, the deceased owner’s income tax basis in assets will “carry over” to the persons who inherit the assets, with some adjustments and lots of confusion.


If you are considering making taxable gifts, it may be prudent to make such gifts early in 2010. Since the gift tax rate is low and the GST tax has essentially been repealed, it may be an excellent time to make gifts. But again, it is uncertain if a future tax bill might retroactively reinstate the GST tax and raise the gift tax rate.


The Estate Planning and Wealth Protection Group at Smith, Gambrell & Russell, LLP strongly suggests that you contact us to determine your planning alternatives. These changes may have a significant impact on your current estate plan. We are ready to discuss whatever changes, if any, you may wish to make to your plan and to assist you with implementing them.

If you are a client of SGR and have not in the past addressed and established your estate plan, it is now critical that you do so. Dying without any estate plan in place will only cause more chaos in the passing of your assets to your family.

For more information, contact your SGR Estate Planning and Wealth Protection counsel.

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