From Donna White at the law firm of Pierce Atwood:
Trusts & Estates
2010: A Year of No Federal Estate Tax
January 11, 2010
In spite of all predictions to the contrary, Congress did not enact a "patch" for the federal estate tax. Therefore, under current law the federal estate tax is suspended for this year (2010) only and will be reinstated as of January 1, 2011 with a $1 million exemption and a 55% top rate. Complicating matters, Congress is expected to take some action during the year and will try to make the legislation retroactive to January 1, 2010. Whether the retroactive component of the legislation will be constitutional or not, will be a continuing question. What follows is a summary of the estate, generation skipping tax and gift tax law for 2010.
As noted, the federal estate tax, including generation skipping tax, is suspended from January 1, 2010 through December 31, 2010. The gift tax, however, is not suspended. The exemption for gift tax purposes remains $1 million throughout the year with a new lower top rate, down from 45% to 35%. Taxable gifts made in 2010, before corrective legislation is proposed or enacted, will stand a better chance of being taxed at a top rate of 35% than gifts made in 2010 after any corrective legislation is proposed. Likewise, transfers to multigenerational trusts (sometimes referred to as "dynasty trusts" or "generation skipping trusts") may be "grandfathered" from the generation skipping tax if made before corrective legislation is proposed or enacted.
Although it will have limited applicability, there is also a new completed gift rule. Any lifetime transfer to a trust that is not a grantor trust in its entirety with respect to the donor or the donor's spouse, regardless of the powers retained by the grantor, is now a completed gift.
Inherited property from a decedent who dies during 2010 will not receive a stepped up basis to fair market value on date of death. Rather, some inherited property will be subject to a modified carryover basis regime. The carried over basis of an asset may be subject to three adjustments:
An executor/personal representative may increase the basis of inherited property by up to $1.3 million in the aggregate.
Unused losses and loss carryovers may be added to the $1.3 million aggregate basis increase amount.
An executor/personal representative may adjust the basis of "qualified spousal property" (property passing outright to a surviving spouse or in a qualified terminable interest property trust) by $3 million.
Thus, total basis may be adjusted by up to $4.3 million, plus any unused losses, for property acquired by a married person. The foregoing notwithstanding, no asset's basis can exceed fair market value at the decedent's date of death and will be "stepped down" if the date of death fair market value is lower than the decedent's basis. The categories of assets that qualify for a basis adjustment are also narrower than the rule for stepped up basis that existed in 2009. It is essential that all of us keep detailed records regarding basis and losses.
The current Massachusetts and Maine estate tax regimes remain unchanged. New Hampshire does not have a state estate tax.
Please contact us if you have questions regarding how the funding formula in your documents will work under federal law in 2010. Keep in mind that this structure will be in place for only one year under current law, and legislative changes are expected.
Trusts & Estates: The Trusts and Estates Group periodically issues electronic articles highlighting key developments and current issues.
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