This important information was recently provided to me from Attorney Alan Rosenfield:
As you may be aware, the federal estate taxes and generation skipping taxes were repealed as of January 1, 2010. Unless Congress acts by passing a law that retroactively addresses this issue, there will be no estate tax due for deaths occurring in 2010.
Although this sounds positive, it can have a significant negative impact on existing estate plans that were created based on the law as it existed with a federal estate tax. For example, an existing estate plan which makes use of marital and credit shelter trusts (also known as Bypass trust or A/B trust) could cause all of the assets to flow into the credit shelter trust, leaving no assets among classes of beneficiaries based on the generation skipping tax exemption. Depending on how the plan is drafted, under the current law, the allocation could dispose of the entire estate, thereby unintentionally cutting out other beneficiaries. Therefore, it is important to review these estate plans to be sure that they accurately reflect the couple’s current intentions.
Additionally, the repeal of the federal estate tax also means that the unlimited marital deduction and “step-up” in basis go away for 2010. In place of the federal estate tax, “carry-over” basis rules apply. This means that beneficiaries including the surviving spouse inherit the assets at the cost basis of the deceased owner rather than at the fair market value as the date of death. Therefore, unlike in 2009 and years prior where a surviving spouse received a full marital deduction and step-up in basis on assets inherited from the deceased spouse, the surviving spouse inheriting in 2010 will instead be subject to capital gains taxes on any assets that do not receive the “step-up” allocation. Furthermore, the “carry-over” basis rules may create an unintended conflict of interest for Executors who are also beneficiaries. In addition to these issues, there are also more complex considerations relative to the 2010 “carry-over” basis rules which we can address if appropriate.
Finally, under the current law, the federal estate tax will be reinstated in 2011 with only a $1 million exemption and with a tax rate as high as 55% for some estates. This is significantly different from 2009 where each person was allowed a $3.5 million dollar exemption with a 45% tax rate for assets exceeding the exemption. Therefore, estates that were not federally taxable in 2009 may be federally taxable in 2011 if Congress makes no changes to the current law, and the tax due on assets above the $1 million dollar exemption would be very significant.
It has been speculated that the federal estate tax will be retroactively reinstated in 2010, but this has not yet occurred and no one can be certain that it will occur. The closer we come to the Congressional elections this fall, the less confidence we have that a new law will be passed this year. For this reason, I advise that you consider a review of your estate plan now to determine if you are affected by current federal law and circumstances.