Congress ended its 2009 session without extending the Federal estate and generation-skipping transfer ("GST") taxes, resulting in the repeal of both taxes as of December 31, 2009. While this sounds like a good thing, it is actually bad because this means that in 2010, the Federal Estate and GST taxes have been repealed. With the repeal of these Federal taxes, the $3.5 million Estate and GST Exemptions were eliminated along with the 45% estate and GST tax rates.
Also, eliminated in 2010 is the adjustment of basis to fair market value at death. This adjustment is often referred to as a "step-up" in basis rule. This rule allowed a heir to step-up the basis of an asset to the date of death so that less gain was recognized upon the sale of an asset.
The step-up in basis rule has been replaced with the "modified carryover basis" rule that requires cumbersome cost basis tracing before increase in tax basis is permitted to an inherited asset.
For some estates, these Federal Estate and GST tax law changes will actually increase the overall taxes paid by virtue of an indivdual's death.
Unless Congress acts, beginning in 2011, the Federal Estate and GST taxes will be reinstated but the Federal exemptions will be greatly reduced. The Estate tax exemption will be reduced to $1 million and the GST tax exemption will be reduced to $1 million indexed for inflation. These lower exemption amounts will substantially increase federal Estate taxes for many estates.
Maryland and the District of Columbia already impose a state Estate tax on estates valued at more than $1 million. Virginia, on the other hand, abolished its estate tax for decedents dying on or after July 1, 2007. It is unclear what these local tax jurisdictions will do in response to these changes at the federal Estate tax level.
The potential impact of the Federal Estate tax law changes can be felt in several ways. For example, Wills and Trusts have included formulas that reference the Estate and/or GST tax exemptions for the purpose of maximizing tax savings. Formulas have also been used to determine the amounts that will pass to family members and charities. Now that the Federal Estate and GST taxes have been repealed, these formulas reference taxes that no longer exist. The consequences of this repeal in the tax laws could mean that a beneficiary may be inadvertently disinherited or there may be an unintentional reduction in the amount of assets passing to certain beneficiaries.
Whether you are impacted by these tax law changes depends on your estate planning documents and also on your financial circumstances. It is advisable to have your estate planning documents reviewed and possibly revised.
Married couples residing in Maryland who have not updated their estate plans since 2006 should be aware that they can revise their estate planning documents to save substantial Maryland estate taxes as a result of changes in the Maryland estate tax law that took place in 2006.
Copyright 2009. The Arnett Law.
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