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Federal Estate Tax 2010 

             Many have already heard about the repeal of the Federal Estate Tax in 2010.  Few observers expected an actual repeal of the estate tax and instead believed Congress would act to maintain the 2009 tax rate and exemption level.  Despite the expectations of all rational observers of the process, however, Congress did not pass legislation in 2009 to extend the current Federal Estate Tax rate and exemptions level.  As a result, the Federal Estate Tax is repealed for one year only, from January 1, 2010 through December 31, 2010.

              Many estate planners and legislative advisors believe Congress may act at some point in 2010 to re-enact an estate tax for 2010 and make that retroactive to January 1, 2010.  There is much debate about the constitutionality of Congress retroactively enacting tax law, although the Supreme Court has previously upheld the constitutionality of retroactive tax laws.  If Congress does not pass retroactive legislation for calendar year 2010, then automatically under current law the Federal Estate Tax will return on January 1, 2011 with a $1 million exemption amount and a 55% tax rate.

              Congress’ failure to pass legislation to prevent this anomalous one-year repeal from occurring is (to put it mildly) irresponsible behavior, and is a prime example of the dysfunctional partisanship that presently plagues Congress.  As a result of its failure to arrive at some acceptable compromise for 2010, the interpretation of an individual’s estate planning documents may be uncertain in the event of his or her demise in 2010.  In almost all sophisticated estate planning documents, key provisions are phrased in terms of tax concepts, such as the tax exemption amount.  The Indiana General Assembly did pass legislation designed to resolve some of this ambiguity.  Nonetheless, a review of an individual’s estate planning documents is helpful to ensure that no questions arise in those documents as to what a provision means or how property should be disposed of upon the individual’s death.  Such a review will ensure that any uncertainty caused by terms referencing the estate tax in documents do not cause unintended tax or distribution issues to arise.

              Another change that takes effect this year (and again, for calendar year 2010 only) relates to the income tax basis of inherited assets.  Income tax basis is the value from which gain or loss is measured when assets are sold.  Under the general rule until December 31, 2009, the income tax basis of an asset was “stepped up” to is current value when the owner died.  For decedents dying in 2010, this automatic change in basis will not occur because there is no federal estate tax.  Rather, the deceased owner’s income tax basis in assets will “carry over” to the person who inherit the assets.  There are planning options that apply in 2010 to help cope with this change, but those options ideally need to be addressed in new language in your document.

              Based on the changes that are now in place in the estate tax regime for 2010, individuals who have Federal Estate Tax planning provisions as part of their estate plan should consider meeting with an attorney to review their plan and ensure that no new documents or document amendments are necessary to clarify the meaning of an individual’s estate plan in light of this Congressional abdication of responsibility.  These changes are crucial in the event an individual were to die in calendar 2010 especially if Congress does not re-enact the transfer tax regime retroactive to January 1, 2010. 

Jeffery D. Stinson, Severns & Stinson
July 7, 2010

The information provided herein is intended only to convey general information related to legal issues commonly encountered and is not intended to be legal advice. This information is not intended to create any legal relationship between Severns & Stinson and the user. Although we strive to make certain that the information presented is accurate and useful, we strongly recommend you consult an attorney specializing in health care and elder law issues
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Information and articles from our website are presented as a public service by Severns & Stinson. We help our clients protect their assets and their rights to health care and long-term care. This article is general in nature and is not to be taken as legal advice to any particular person. Consult an attorney for specific legal advice for your circumstance.