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The Latest on Estate Tax Reform

As of today, no movement has been made on the estate tax reform front. At this point, it seems unlikely that Congress will act before the end of the year which means that an event that many once thought to be impossible will soon become a reality: the repeal of estate and GST tax and the implementation of carryover basis.

However, yesterday Senate Finance Committee Chairman, Max Baucus, and Senate Finance Ranking Member, Chuck Grassley, pledged in writing to Senate Majority Leader, Harry Reid, to extend various expiring tax provisions early next year to provide for a seamless transition without a gap in coverage.

For 2009, there exists a $3.5 million lifetime exemption and a 45% max rate for estate and GST tax. In 2010, there would be no estate or GST tax, but the gift tax would remain at a 35% max rate. In 2011, if no changes are made, we will see the return of the pre-2001 system: a $1 million lifetime exemption, a 55% max rate, and no more carryover basis.

With 2009 on the verge of closing its books, much of the attention has now shifted to 2010 and what a potential change in the law could mean for taxpayers and practitioners. Questions abound as to whether the estate and GST taxes will be re instituted and, if they are, will they be retroactive. Many are also probably wondering what the repeal means for their current estate plan and if additional steps should be taken to taken to take advantage of the new law.

Here are some items to consider:

  1. Determining carryover basis is likely to be a challenge, but there are two exceptions to the carryover basis provisions (executor can allocate up to $1.3 million to increase basis assets and $3 million to increase the basis of assets passing to a surviving spouse under certain conditions). It is important to make sure your estate planning documents permit the executor to make these allocations.

  2. The current GST exemption amount stands at $3.5 million. If you have done, or plan to do, any generation skipping planning, you may want to consider using up this exemption before the end of the year since it won't be around in 2010 and will only be $1 million in 2011.

  3. Any gifts you are planning to make to grandchildren or "direct-skip" persons in trust can be done in 2010 when there is no GST tax. It is important to consider the possibility that any new legislation could be retroactively applied to such transfers when establishing these trusts.

  4. Formula gift clauses in wills and trusts could become problematic. Often distributions made from trusts will be based on drafted formula clauses that reference the federal estate tax in calculating an amount passing to a beneficiary. Seeing as how there will be no federal estate tax in 2010, the application of such clauses could become complicated. It is important to review your documents to address any such issues.

Given that the bill passed by the House was highly partisan, it is difficult to pine what might happen next year especially considering 2010 is an election year. We here at Jeffrey Burr as surprised as anyone that we are on the verge of being able to say, "It's the end of the estate tax system as we know it... at least it is for now."

-Attorney Jeremy Cooper