The Federal Estate Tax -

De Mortius Nil Nisi Bonum

The federal estate tax is now dead. Don't speak ill of the dead - what we have now may be worse.

In 2001 Congress passed the Economic Growth and Tax Relief Reconciliation Act of 2001, known as "EGTRRA." Before EGTRRA was passed, every estate was entitled to a credit against the tax which had the effect of wiping out the tax on $1,000,000 of assets, and the top federal estate tax rate was 55%. There was a credit against the federal estate tax for state death taxes. Inherited assets received a "stepped-up basis" - the tax basis of most inherited assets was increased to the value of the assets as of the date-of-death of the decedent.

EGTRRA gradually raised the estate tax exemption (to $3,500,000 in 2009), reduced the top transfer tax rate to 45%, and phased out the state death tax credit. On January 1, 2010 the federal estate tax and the generation-skipping transfer tax were wiped out, as was the stepped-up basis. The gift tax remained, with a top rate of 35%.

The step-up basis no longer applies - it is replaced by a "carryover basis." When property is inherited, the tax basis of the inheritor will be the same as the tax basis of the decedent, with two exceptions. The decedent's executor may allocate up to $1,300,000 to inherited assets to increase the basis of those assets, but not beyond the fair market value at death. Also, the executor may allocate up to $3,000,000 to increase the bases of assets which pass to the surviving spouse, either directly or through a QTIP trust.

On January 1, 2011, unless Congress acts in the meantime, the changes made by EGTRRA will "sunset" - the estate tax and the generation-skipping transfer tax will return, with an estate tax exemption of $1,000,000 and a top rate of 55% (60% in certain cases) on estate and gift taxes. The state death tax credit will once again be in effect.

Last year it was assumed that Congress would act before December 31 and keep the then estate tax law in place. It is surprising this did not happen - particularly considering that Congress had enough time - from the enactment of EGTRRA until December 31 last year - to consider what ought to be done.

Congress might soon vote to continue the federal estate tax, and they might make the reinstatement of the tax retroactive to the first of January, 2010. There is question as to whether Congress has the power to enact a taxation measure and make it retroactive, so if the law is made retroactive litigation will probably result.

No longer faced with a deadline, Congress could take its time passing a new law with respect to the estate tax. We do not know what that law might provide.

There is also the possibility that Congress will leave the federal estate law in a state of rigor mortis. There are some who believe that the federal estate tax generates economic costs which are more than it produces in revenue - whether this group has enough support to prevent the estate tax from returning remains to be seen.

Your estate plan should be reviewed to determine whether it works well under the latest developments in the estate tax. Please call us as soon as possible to schedule an appointment.