Estate Taxes in 2010: A Brave New World?

Due to Congressional inaction, the “unthinkable” occurred January 1, 2010: the federal estate tax was repealed! But only for one year. Should Congress fail to takeaction regarding transfer taxes this year, federal estate and gift taxes will return topre-2002 levels in 2011 with a 55% tax rate and an exemption amount of only $1 millionper person. Further complicating matters, this one-year estate tax repeal brings withit a “modifi ed carryover basis” system. This basis system could cause record-keepingnightmares for estates of persons dying in 2010 since their heirs/benefi ciaries will berequired to use the decedent’s basis in the property the heirs/benefi ciaries receive forcapital gains tax purposes (rather than “fair market value” at date of death which hadbeen the basis system for years).

So, uncertainty reigns in the world of estate planning. Adding to the confusion is thelikelihood that Congress will take some action in 2010 to reinstate the estate tax, possiblyat 2009 levels – perhaps even retroactive to January 1. However, since Congress remains quite busy with other pressing matters and previous attempts at changing the estate and gift tax laws have beenunsuccessful, it is impossible to predict if and when Congress will act to eliminate the uncertainty and disparity in our federal transfer tax laws.

Now that you have some sense of the unpredictable environment we are currently in, you may be asking: “What should I be doing about this?” The answer is: “It depends.” First, you should review your personal financial situation to determine if your assets might fall within the past, present and (foreseeable) futurefederal estate tax exemption amounts:

If so, a review of your current estate planning documents is advisable in order to determine whetherthe documents are still consistent with your goals and objectives. Many estate planning documents for both federal and state.  In the meantime, however, we welcome your call with any questions.

John R. Nelson