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The 2010 Estate Tax Repeal: A Summary of the Changes for 2010 and 2011

As a result of Congressional inaction in 2009, the federal estate, gift, and generation-skipping transfer (GST) taxes have changed significantly from last year.  The major changes are summarized below.

In 2009, the estate tax exemption and the GST tax exemption were both $3.5 million.  For both taxes, the maximum tax rate for transfers in excess of the exemption was 45%.  The gift tax exemption was $1 million, with a maximum tax rate of 45% for transfers in excess of the exemption.

On January 1, 2010, the estate and GST taxes were repealed for one year.  It is still possible that Congress will act to reinstate these taxes for 2010.  It is also possible that Congress will make the taxes retroactive to January 1, 2010, an action that will most certainly be challenged as unconstitutional. 

During 2010, the gift tax remains in place with the same $1 million exemption as last year.  However, the maximum gift tax rate on gifts in excess of the exemption has decreased from 45% to 35%.  The $13,000 annual gift tax exclusion per person, per year remains in place.

For deaths in 2010, a “modified carryover basis” regime currently applies.  In 2009, the law provided that the income tax basis (used to determine gain or loss upon sale) of property acquired from a decedent was generally “stepped up” to its fair market value at death.   In 2010, there is no step-up in basis to the date of death value.  Instead, $1.3 million is permitted to be added to the basis as it existed just prior to death, and an additional $3 million basis adjustment is permitted for certain transfers to surviving spouses.

Unless Congress acts, the estate, gift and GST taxes will be reinstated in 2011 as they existed before 2002.  The estate tax exemption and the gift tax exemption will both be $1 million, with a maximum tax rate of 55% for transfers in excess of the exemption, plus a 5% surcharge tax on transfers between $10 million and $17.184 million.  The GST tax exemption will be $1 million, plus an adjustment for inflation from 1999, with a maximum tax rate of 55% for transfers in excess of the exemption.

Because of the uncertainty in the law for 2010 and 2011, it is difficult for families dealing with a death in 2010 to complete the administration of the estate.  However, many of the actions that must be taken remain the same.  Similarly, those considering doing an estate plan should not delay in doing so, as many important non-tax issues should be addressed, such as planning for incapacity, planning to avoid probate, and planning for minor children and other beneficiaries.  Existing estate plans should be reviewed to ensure that the plan will work as intended if a death occurs in 2010.

For more information, see Death, Taxes & Congressional Malpractice by Michael Curtis.

Eiko Itoh, Trusts & Estates Group