Important Tax Changes Effective January 1, 2010
By Wendy S. Goffe and Marcia K. Fujimoto
January 20, 2010
The federal estate tax and generation-skipping transfer tax were repealed as of January 1, 2010, and will come back on January 1, 2011, with an exempt amount of $1,000,000 (compared to $3,500,000 in 2009) and a top rate of 55% (compared to 45% in 2009).
Please note that the federal gift tax laws remain in place (although at a lower rate), and the State of Washington estate tax, which applies to estates exceeding $2 million, has not changed.
We at Graham & Dunn PC, like the tax and estate planning community at large, expected that Congress would amend the Internal Revenue Code before the end of 2009 to prevent this result. In fact, before the end of the year, several bills were pending that would have prevented repeal. We did not expect that it would be necessary or appropriate to undertake a review of your estate planning documents prior to the end of 2009. And it is still probable that Congress will reinstate these taxes during 2010 at prior rates, possibly even retroactively.
However, it is now appropriate to determine whether your estate plan should be amended. Wills or trusts that refer to the marital deduction, the federal estate tax, the unified credit, the estate tax exclusion amount, the estate tax charitable deduction, and/or the generation-skipping transfer tax, should be reviewed promptly. Documents that contain a gift determined by a formula clause should also be reviewed.
If you find any of these tax law oriented phrases in your documents or if you would like us to review them for you, please contact us so we can determine whether corrective action is necessary. In many cases, a simple amendment is all that will be necessary; however, in some cases, more significant revision may be appropriate. We will be able to give you an estimate of the cost of the changes when we review your documents.
Also, if your estate planning documents have not been revised since 2001, they are almost certainly out of date as to the tax aspects and should be reviewed.
Both prior to repeal, and after 2010, a beneficiary receives a basis equal to the fair market value of the property at the time of the decedent’s death.
Under the Internal Revenue Code as it now stands, on January 1, 2011, the estate tax and generation-skipping tax will return to rates (up to 55%) and exemptions of $1,000,000 (indexed for inflation) that were previously in effect in 2001. Effective now and for the rest of 2010, we have in place a “modified carryover” basis system. Under this system, assets passing to an estate or to trust beneficiaries will not have their income tax cost basis adjusted to date of death values. Instead, property received from a decedent while the tax is repealed will have a basis in the beneficiary’s hands equal to the lower of the decedent’s basis or the fair market value of the asset on the decedent’s date of death (if the decedent’s property exceeds exemptions provided under the law). The basis of certain assets acquired from a decedent may be increased up to $1.3 million and by an additional $3 million for assets passing to a surviving spouse, either outright or in a qualified trust.
Given the rules in place for now, it is critical that you retain financial records that could document cost basis should this become necessary in the future.
Congress may well amend these tax laws in 2010 by re-enacting the prior rules, possibly retroactive to January 1, 2010. This means that any planning done now runs the risk of being subjected to tax laws passed later this year.
The temporary repeal of the estate and generation-skipping transfer tax and the reduction in the federal gift tax rate may present estate planning opportunities for those willing to take the risk that these taxes will not be reinstated retroactively. If you plan to make taxable gifts (i.e., gifts in excess of the $13,000/$26,000 annual gift tax exclusion) in excess of the
$1 million lifetime exemption, you may want to consider doing so this year while the gift tax rate is 35% (down from last year’s 45%), but it is entirely possible that a higher gift tax rate could be enacted retroactively. You could also consider gifts to grandchildren or to trusts for their benefit with the hope of avoiding generation-skipping transfer tax, unless, again, it is retroactively reenacted.
If you have questions or wish to discuss the above information further, please contact a member of our Wealth Management Team. We would be happy to discuss this with you further and explore how your documents could be modified to deal with this development.
