& Congressional Malpractice
By Michael Curtis
The certainty of death and taxes took a partial hit
when Congress failed to take action to extend the gift, estate and generation-skipping
transfer taxes as they existed in 2009 or to pass more comprehensive
legislation. Confusion and uncertainty
now reigns supreme for all taxpayers and their estate planning advisers. Some commentators have characterized this
failure to act as congressional malpractice.
On January 1, 2010 the federal estate and generation-skipping
transfer tax laws were repealed, but only for one year, based on major transfer
tax legislation passed in 2001. Families
who must deal with a death during 2010 will have to contend with a number of
uncertainties, including the possibility that Congress will reinstate these
taxes in 2010 and attempt to make them retroactive. And even then, the constitutionality of such
action is likely to be challenged and until the U.S. Supreme Court passes
judgment taxpayers and their advisers will struggle with the appropriate action
to take in administering those estates.
It is a tragedy that we must deal with such uncertainty.
The temporary repeal of the estate and generation-skipping
transfer taxes is just that Ė temporary.
During this moratorium year, the gift tax continues to exist. The annual exclusion remains at $13,000 per
person, per year, the $1,000,000 gift tax exemption amount is the same, the tax
rate on gifts in excess of the exemption amount is reduced from 45% to 35% and
the basis adjustments to fair market value at date of death are changed
significantly. The basis adjustment is
now only $1,300,000, which is added to the basis just prior to death (instead
of being the value of the asset at date of death) and an additional $3,000,000
basis adjustment is permitted for qualifying transfers to spouses. Issues concerning the allocation of the basis
adjustment, reporting requirements and many others have yet to be addressed by
Among the action that Congress could take in 2010, if
they can get past the partisan politics that caused this problem in the first
place, would be to (a) reinstate the law in effect in 2009 retroactively, (b)
reinstate the law in effect in 2009 prospectively during 2010, and (c) pass a
new estate and generation-skipping transfer tax law effective prospectively or
on January 1, 2011. Or Congress could
again fail to take any action, which will reinstate of the gift, estate and
generation-skipping transfer tax laws in effect prior to the 2001
legislation. Inaction again in 2010 will
cause a return to a unified gift and estate tax law with a $1,000,000 exemption
amount (that could be used during lifetime with any balance remaining available
to be used at death), a graduated tax rate beginning at 41% and reaching 55%
for the portion of the estate over $3,000,000 and a 60% rate for the portion of
the estate over $10,000,000, and a generation-skipping transfer tax exemption
amount of $1,000,000 that must be indexed for inflation through 2010. And there may be a return to a complete basis
adjustment to the fair market value of the assets at the date of death.
What Should You Do?
If a person dies in 2010, many estates, large and
small, will need to wait and see what action the IRS and Congress take before
they will be able to complete the administration of the estate. Some actions remain the same. Executors and Trustees still need to identify
all assets, determine how title is held and decide whether any legal action is
necessary to change title. For example,
if title is in the decedentís name and it should have been in the decedentís
trust, a determination of the appropriate manner of transferring that asset to
the trust will need to be made. All
assets must be appraised in the same manner as before the temporary repeal. Other steps, such as the allocation of basis
and all required reporting to the IRS will have to await further guidance. And because most all Wills and trusts refer
to tax terms that are no longer in effect for 2010, there may be questions of
interpretation that may necessitate filing petitions with the Probate Court to
answer such questions.
Existing estate plans should be reviewed by everyone,
regardless of the size of their estate.
Interpretation issues can be addressed by amendments to documents to
clarify how they should be terms no longer a part of the law in 2010 should be
interpreted in the event of a death during 2010. Many plans divided the community and separate
property of married couples into 2, 3 or 4 new trust after the death of the
first spouse to die. In 2010 this will
generally result in the decedentís 50% community property interest and 100%
separate property interest passing into a trust that previously was designed to
receive assets with a value approximately equal to the estate tax exemption
amount remaining at the personís death.
For estates of married couples over $7,000,000 this means that
substantially more assets than was originally planned will not go to the
surviving spouse. And for those who were
leaving the remaining exemption amount to children or grandchildren instead of
the surviving spouse, the survivor may receive a significantly smaller share of
the estate than is desired or was intended.
These plans require immediate attention.
Planning opportunities still exist in 2010. Low interest rates make techniques such as
Grantor Retained Annuity Trusts (GRATs) and Charitable Lead Trusts (CLTs)
attractive. And as noted above, making
taxable gifts in 2010 can be attractive for larger estates because of the
reduced 35% gift tax rate on amounts in excess of the $1,000,000
exemption. Because many assets,
particularly real estate, have depressed values and gifts of less than 100% of
the assets will qualify for marketability and other discounts, these types of
gifts can provide significant current transfer tax planning savings despite the
existing long term transfer tax uncertainty.
Beware, however, of the possibility of retroactive legislation that
would subject any taxable gifts to tax at a 45% rate. If you believe, as I do, that we will always
have a transfer tax system that will include gift, estate and generation-skipping
transfer taxes, then now could be one of the best times to take action to
implement an aggressive gifting program.
This article is intended to provide a simple,
straightforward summary of the major impacts of the one year repeal of the
estate and generation skipping transfer taxes on your estate plan or the
post-death estate administration of persons who die in 2010 before there is
clarity. It is not intended to be
exhaustive and there are many, many other technical issues that will need to be
addressed in any given situation.
publication is of general applicability and not specific to any set of
facts.† Thus, it should not be relied
upon for any specific case or matter without further discussion.† No attorney-client relationship is formed as
a result of your reading or replying to this publication, which is not intended
to provide legal advice on any specific matter, but rather to provide insight
into current developments and issues.