Did You Know - The State of Estate Tax


Under current law, the estate tax disappeared on January 1, 2010, only to re-emerge January 1, 2011 with a $1 million exemption and 55% tax rate. (In 2009, the exemption was $3.5 million with a 45% tax rate.) The gift tax exemption remains at $1 million per person over their lifetime, but under current law, the tax rate drops from 45% to 35%.

Under current law for 2010, a step-up in basis (increase to fair market value at the date of death) would be allowed only on the first $1.3 million the decedent left to heirs, plus another $3 million to a surviving spouse. That would mean that for this year, heirs would receive less income tax basis from a decedent and would pay more capital gains tax when inherited assets were sold. And, it would mean that the executor would have to determine the decedent’s carry over basis in assets he/she owned at death, a daunting task if adequate records have not been kept over time.

We all expected Congress to address the 2010 no-estate tax law at least by the end of 2009 and to extend the 2009 limits and tax rates to 2010 as a stop-gap measure. The House passed a bill to extend the 2009 laws permanently into the future, but partly due to the number of differing opinions about the estate tax in the Senate, they were unable to garner enough votes in December to pass anything.

Congress has admitted that they have left us in a state of chaos, and some members have made a solemn promise to address the estate tax early this year. If a law reinstating some type of estate tax passes this year, the next big question is whether or not it would be constitutional. We have heard those who say it’s a problem and those who say it is not.

Although there is much discussion of possibilities and probabilities, what Congress will do and when it will act is unpredictable.

As we wait to see what direction Congress will head, what should you do? Take an aggressive stance before the law changes and hope your position is grandfathered in? Revise your trust agreement, considering that all your assets might end up in the Bypass Trust and none in the Marital Trust? Make taxable gifts subject to a “low” rate of gift tax? Sit tight and do nothing until there is more clarity? There is no one answer that fits all, and you should discuss your personal concerns and situation over with your BPM advisor and your estate attorney.

Despite these uncertain times, elements of your estate planning should continue. You should confirm your will and trust agreements are current and include the proper executors, successor trustees, beneficiaries, and your business and family succession plans are addressed.

Be assured we will continue to monitor this situation and send out updates when major shifts in policy appear to be imminent. 


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