Status of Estate Tax for 2010: ESTATE TAX REPEALED
As you may already know, despite last minute efforts by key members of Congress at the end of 2009, the estate tax has been eliminated for one year in 2010. The estate tax is a tax imposed on the property and assets that an individual leaves behind at death. Under 2009 laws, the first $3.5 million of the estate was exempt from the tax while any amount over the $3.5 million was taxed at 45%. If action is not taken to make the repeal permanent or to set a new estate tax rate and exemption by December 31, 2010, the estate tax will return in 2011 to pre-2001 levels, which would mean a $1 million exemption and a maximum 55 percent estate tax rate. The gift tax is retained with a 35% rate and a lifetime exclusion of $1 million.
For decedents dying in 2010, unless and until changes are made, there will be no estate tax. With the repeal of the estate tax, there is also a repeal of the step-up in basis rules. The estate of a decedent dying in 2010 will not, unlike under prior law, be afforded an unlimited step-up in basis of estate assets. These estates will be entitled to a step-up in basis on the first $1.3 million (with an additional $3 million for qualifying gifts to a surviving spouse). Because there is not step-up in basis for estate assets valued in excess of $1.3 million, heirs of estates over that level who later sell property may pay large capital gains taxes.
Even though the estate tax is supposed to be gone for the entire year, certain members of Congress are promising to take action early this year to bring the tax back, and not just for 2011. Some have stated that they will make any estate tax legislation retroactive to January 1, 2010. As a result, it is uncertain with respect to (1) whether the estate tax will be retroactively reinstated or remain repealed; (2) if reinstated, the amount that an individual can pass free of estate tax; and (3) the basis of property acquired from a decedent.
Most estate plans prepared by lawyers at MLA have been drafted to take into account the fluctuation of the estate tax-exempt amount from year-to-year. However, a review of your estate plan may be needed to confirm that you continue to benefit those loved ones that you had originally intended and that you are taking maximum advantage of the limited step-up in basis.
If you would like to review your current estate plan and to discuss how this law change will impact you, please feel free to contact your MLA estate planning attorney.
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