Recent Federal Wealth Transfer Tax Changes
Require Review of Your Estate Plan

Due to recent changes, as well as anticipated future changes to the federal wealth transfer tax laws, your estate planning documents (Wills and Trusts) should be reviewed to ensure that they still attain your current goals.  Furthermore, if you are married, you and your spouse should review the ownership of your assets to ensure that appreciated assets are allocated appropriately in order for each spouse to be able to take advantage of so called “tax basis adjustments” provided by the new laws.

In addition, there are certain opportunities that currently exist for a limited time relative to lifetime gifting.  Due to our depressed economy and historically low interest rates, this is an excellent time to consider gifting techniques of all kinds, including grantor retained annuity trusts (GRATs), sales to family trusts and interfamily loans.  Legislation has been proposed that would limit the efficacy of GRATs by requiring that their term last a minimum of ten years.  Currently short-term GRATs, which many estate planners prefer for most situations, are still available, but may not be in the near future.

Background

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) brought many changes to the federal estate, gift and generation skipping transfer (GST) tax system.  Among other changes, EGTRRA increased the estate and GST exemptions, reduced tax rates and replaced the state death tax credit with a state death tax deduction. 

For budgetary reasons, the Act also provided for a one-year repeal of the estate and GST taxes in 2010, to be followed in 2011 by a return to the pre-2001 law.  At the time of EGTRRA’s passage and for the following nine years, most practitioners and commentators believed that a subsequent law would be enacted prior to 2010 to prevent the repeal from occurring.  However, Congress failed several times to reach consensus on a fix to the problem and, on January 1, 2010, the federal estate and GST taxes were repealed for 2010.  At the same time, a new system of “modified carryover basis” replaced the long-standing “step-up basis” regime applicable to assets transferred to a decedent’s beneficiaries. 

Although many still believe that Congress will pass a new law reinstating the federal estate and GST taxes for 2010, several attempts to reach a consensus (as recent as mid-May) have failed.  Given the implications if the changes remain in place permanently, we thought it would be helpful to provide our clients and friends with information regarding the current status of the law and where it is headed if the law is not changed.  

2010

• There is no federal estate tax for people dying in 2010.

• The old rule granting a decedent’s beneficiaries a “step-up” of tax basis to fair market value on inherited assets is repealed and is replaced by new “modified carryover” basis rules, which will give the beneficiaries the decedent’s cost basis in the assets, subject to limited basis adjustment rules discussed below.

• The basis in appreciated assets passing to a decedent’s beneficiaries may be increased by $1.3 million by virtue of a special basis adjustment exercisable by the decedent’s executor.  The basis in appreciated assets passing to a decedent’s surviving spouse may be further increased by $3 million through a spousal basis adjustment.  Further basis increases may be available for unused net operating losses (NOLs), carryover losses and other available deductions under Internal Revenue Code Section 165.

• The federal gift tax remains in place with a $1 million lifetime exemption and a reduced tax rate, currently 35%.

• There is no GST tax in 2010 on generation skipping transfers (transfers to members of a “skip” generation- grandchildren or more remote descendants, outright or in trust.)

• The Massachusetts estate tax and $1 million exemption remains unchanged.

2011

• If there is no change made to the current law, on January 1, 2011, both the federal estate tax and GST tax will be reinstated.

• The estate tax top rate will be 55 percent, with a 5 percent surcharge on certain large estates and gifts.

• The federal estate tax and GST tax exemption amounts will be set at $1 million.

• The state death tax credit will be restored.

• Step-up in basis for inherited assets will return.

Please contact us to review your estate plan and discuss whether revisions to your existing documents are necessary or advisable.