Temporary Estate Tax Repeal Sows Confusion for Estates

The federal estate tax and generation-skipping tax “officially” expired on January 1, 2010, under laws enacted in 2001.  But many expect Congress to take action in the near future to restore these taxes – possibly retroactive to the beginning of 2010.  The federal gift tax remains in effect for 2010, but with the top tax rate reduced from 45% to 35%.  The $1 million lifetime gift tax exemption, and a $13,000-per-donee annual exclusion, continue in force in 2010.

If Congress fails to act this year, the repeal of estate tax and generation-skipping tax would continue only through December 31, 2010, and both taxes would return in 2011.  After 2010, the tax credits and exemptions would shelter estates (and generation-skipping transfers) of only $1 million (compared to $3.5 million in 2009).  The top tax rate would become 55% for gifts, estates and generation-skipping transfers.

The current state of affairs has created concern and confusion for many estates.  No one can predict what Congress will do, when they will do it, or if measures such as restoring transfer taxes retroactively will hold up in court.

Two groups of people probably need to call their estate planning advisers:

1. Anyone who has a will or revocable living trust containing a “credit shelter trust” (sometimes called a “B” trust or “bypass trust”), or any other estate distribution plan based on a formula clause that refers to the estate tax credit shelter ($3.5 million in 2009) or other estate tax yardsticks, such as "adjusted gross estate."  Such clauses may be hard to interpret with estate taxes repealed, or may leave too much in trust, or otherwise distribute assets in ways not foreseen or desired by the estate owner. 
2. Risk-tolerant estate owners who want to use the current “window of opportunity” aggressively to make taxable gifts at the reduced 35% tax rate, or make gifts to grandchildren (or other so-called skip persons) while the generation-skipping transfer tax is repealed.  Both of those strategies could blow up if Congress changes the law retroactively, and individuals clearly should follow their advisers’ guidance every step of the way.

Copyright © by R&R Newkirk. All rights reserved.