An Open Letter to Clients of Goodall & Yurchak
By: H. Amos Goodall, Jr.
Due to Congressional inaction in 2009, a one year suspension of the federal estate and generation-skipping transfer ("GST") taxes is now in effect. Although Congree may act this year to restore the estate and GST taxes, the timing, substance and other details of any tax legislation are not now predictable with any degree of certainty.
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Reinstatement Congree could reinstate the federal estate and GST taxes in 2010, either reroactively to Janauary 1 (which the US Supreme Court may block in whole or in part as unconstitutional) or prospectively. Any reinstatement of the estate and GST taxes could be at rates as they existed in 2009 ($3.5 million estate and GST tax exemptions, 45% top tax rate) or at new rates (such as $5 million exemptions and 35% rate). Estate plans prepared, based on 2009 tax laws need to be re examined, since many wills create trusts which may not be necessary and may or may not be needed. News reports suggest that the President's budget assumes the estate tax will be made permanent at the 2009 tax rate, which will be good news to most Pennsylvanians.
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Gift Taxes The federal gift tax remains in effect in 2010, with a $1 million per person lifetime exemption, a $13,000 per donee annual exclusion and a top gift tax reate reduced from 45% to 35% (which, like possible estate and GST tax legislation, could be replaced with retroactive effect).
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Carryover Basis. Until the end of 2009, your heirs received inherited property with a tax basis of the property's value as of the date of death. A significant change for 2010 is the creation of a "carryover basis" regime for the purpose of determining the tax basis of property acquired from a decedent. Under this rule, the basis for determining gain or loss ont he sale of capital assets acquired from a decedent will be equal to the lower of (i) the decedent's basis in such assets prior to death, and (ii) the date of death fair market value of such assets (as opposed to simply the date of death fair market value under prior law). If property has appreciated in value during lifetime, this change will require an estate beneficiary to pay capital gains tax on that appreciation when the property is sold. However, the executor of an estate may allocate $1.3 million of basis to appreciated assets in all estates and an additional $3 million to increase the basis of assets passing to a surviving spouse.
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2011 Taxes If the federal estate and GST taxes reamin suspended for a full year with no further action by Congree, these taxes return in 2011 at rates as they existed prior to the Economic Growth and Tax Relief Reconciliation Act of 2001 ("2001 Tax Act") with a $1 million estate tax exemption, a GST tax exemption of $1,100,000 (indexed for inflation), and a 60% top estate tax rate. Additionally, in 2011, the gift tax is scheduled to return to rates as they existed prior to the 2001 Tax Act ($1 million exemption, 60% top rate). The carryover basis regime of 2010 will probably no longer apply to estate assets in 2011.
Many estate plans and related documents were created with the assumption that a federal estate tax and, in some cases, a GST tax, exist. An estate plan designed to take advantage of estate and GST tax deduction, exemptions and credits may contain provisions that are defined or described with reference to those taxes. As a result, the meaning of your current planning documents may be unclear, or your plan may have unintended effects, if you die while there is no estate or generation-skipping tax or when the exemptions or rates are different from those anticipated when the plan was drafted. In addition, yor estate plan may not be designed to take full advantage of the $3.0 million dollar basis increase allowed to surviving spouses. On the other hand, if Congress takes no action of gift, estate and GST tax in 2010, planning opportunities may exist.
Many people expect Congress to address these uncertainties this year, but even if Congress takes no action, most of the problems generated by this unexpected development are of limited duration - one year, at most, unless Congress enacts a permanent estate tax repeal. While immediate action may not be warranted in all cases, we invite our estate planning clients meet with us to review plans, in light of current legislative developments or generally. PLEASE NOTE: This letter is meant to provide a prief overview of the recent estate tax changes. It is not meant to be, and should not be relied upon, professional advice. If you want to discuss how this affects your estate planning, please acll us.