At the end of 2009, Congress did not extend the then-effective $3.5 million exemption from the federal estate tax and the generation-skipping transfer tax, and the maximum tax rate of 45 percent for those taxes. As a result, the federal estate tax and generation-skipping transfer tax, are automatically repealed for one year—2010—and then are automatically reinstated in 2011 with lower exemptions and higher tax rates. For 2010 only, gift tax rates are also reduced, and there is a change in the income tax basis of property owned by individuals who die in 2010.

More specifically:

              • The estates of individuals who die in 2010 will not owe any federal estate tax.

              • Gifts made in 2010 to grandchildren or younger-generation beneficiaries (during lifetime or at death) will not be subject to the generation-skipping transfer tax.

              • Both the federal estate tax and generation—skipping transfer tax will be reinstated in 2011. There will be a $1 million exemption from each tax (reduced from the $3.5 million exemption existing in 2009), and the maximum tax rate will be 55 percent (increased from the 45 percent maximum rate of 2009).

              • The lifetime income tax basis of property passing from individuals who die in 2010 will “carry over” to those who inherit the property, rather than be “stepped up” to date-of-death value. There will be a limited “step up” for inherited property ($1.3 million for most heirs, with an additional $3 million for property passing to a surviving spouse). For individuals who die after 2010, the rule of “stepped-up” basis to date-of-death value will be reinstated.
  • The gift tax remains in effect, even in 2010. Lifetime gifts (reduced by certain exemptions and exclusions) will continue to be subject to gift tax. However, for 2010 only, the maximum gift tax rate is reduced from 45 percent to 35 percent. In 2011, the maximum gift tax rate returns to 45 percent.

The above changes in tax rules and rates are complicated enough without one important further complication: No one knows if these changes will stay in effect or be reversed.

The “MAYBE” Part

Many observers firmly believe that these changes in tax rules and rates will themselves be “repealed” and that the 2009 law will be reinstated retroactive to January 1, 2010. Others just as firmly believe that these changes—including repeal in 2010 with reinstatement and higher rates in 2011—will remain effective. Still another possibility is that the changes will be effective for 2010, but not for 2011—when the 2009 rules will be reinstated but with different tax exemptions and tax rates.

What will happen—and when? Nobody knows.What we do know is that the new changes will remain effective if Congress does nothing.We also know that the topic is controversial, and other issues are at the forefront of the Congressional agenda.

What Should You Do?

How can anyone effectively plan in such an uncertain environment? The answer is—with great difficulty, and it depends on your situation. For many of our clients, the best response to the current state of affairs may be to “wait and see.” For others, more prompt action may be required or desirable. For some, there may be opportunity should the new changes not be retroactively reversed.

Please contact us if:

  1. You have not recently reviewed your estate plan in its entirety.

  2. You have a “formula” marital, charitable, or generation-skipping transfer gift in your will—that is, a gift the size of which is determined by reference to the federal estate or generation-skipping transfer tax exemption. Your will may need to be revised to ensure your estate is distributed according to your wishes.

  3. You want to discuss estate planning opportunities that may be available (or not), only in 2010.

These are interesting—and uncertain—times. Ballard Spahr’s Family Wealth Management attorneys are available to answer any questions you may have and to assist you in working through these new and complicated planning and tax issues. Please do not hesitate to call or e-mail any one of us.

IRS “Circular 230” Disclaimer Note: Under certain circumstances, a taxpayer may avoid certain penalties under the Internal Revenue Code by relying on a formal opinion of counsel that meets specific IRS regulations. Any tax advice in this communication does not constitute a formal opinion that meets the requirements of those regulations. Accordingly, the IRS regulations require us to advise you that any tax advice in this communication is not intended or written to be used, and cannot be used by you, to avoid penalties that the IRS might attempt to impose on you.

Copyright © 2011 by Ballard Spahr LLP.
(No claim to original U.S. government material.)

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the author and publisher.

This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.