Because Congress failed to act by the end of last year, we must advise you of several changes to the estate, gift and generation skipping transfer tax laws that may impact your current estate plan. We joined the tax and estate planning communities in our thinking that Congress would indeed act to avoid the confusion that these changes have caused. As the laws currently stand, the following is a summary of changes that will apply this year and next year.
Estate Tax – There currently is no estate tax. Absent further action, the estate tax will return in 2011 with rates as high as 55% on estates that exceed $1 million. This will represent an increase over the 45% tax rate on estates that exceeded $3.5 million that had applied in 2009.
Gift Tax – The gift tax currently remains. The gift tax annual exclusion ($13,000) and life time exemption ($1 million) amounts have not changed this year. However, lifetime gifts in excess of the lifetime exemption amount are now taxed at a 35% gift tax rate (whereas they had been taxed at a 45% gift tax rate in 2009). Absent further action, the gift tax rate will be as high as 55% on estates that exceed $1 million.
Generation Skipping Transfer (“GST”) Tax – There currently is no GST tax. Absent further action, the GST tax will return in 2011 at the rate of 55% on estates that exceed an inflation adjusted value of $1 million (likely to be $1.34 million). This will represent an increase over the 45% rate on estates that exceeded $3.5 million that had applied in 2009.
Five Percent Surtax – Absent further action, a 5% surtax for estate, gift and GST tax purposes will be assessed on transfers between $10 million and $17.184 million.
Illinois Taxes – There is currently no Illinois estate tax. Absent further action, the Illinois estate tax will return in 2011 and apply to estates that exceed $1 million.
Basis Rules – Estate assets no longer receive a full step up in basis and instead may only receive a partial step up in basis with carryover basis rules applied to the balance. Under prior rules, all estate assets would receive a basis step up equal to the fair market value as determined for estate tax purposes. Under current law, estates may increase the basis of property up to $1.3 million generally and an additional $3 million for property passing outright to a spouse or to a qualified trust for the spouse’s benefit. The balance of estate property must retain its original basis which will carry over to the recipient.
Legislative Action – Congress has expressed an interest in reinstating the rules as they applied last year by this spring. It also has expressed its intent to make these changes retroactive to January 1, 2010. Any retroactive tax legislation could be subject to court challenge, but courts previously have supported retroactive changes to tax laws. The Illinois legislature likewise may reinstate its estate tax and may do so retroactively. We will keep you apprised of changes in these tax laws.
Current Estate Plans – The changes described above affect the interpretation of estate plans for married persons which provide for the funding of an estate tax credit shelter trust and a separate marital trust for the sole benefit of a surviving spouse. Confusion arises because there is no longer an estate tax to guide the formula for funding these separate trusts. Further concerns will arise if different family members are beneficiaries of these separate trusts. In essence, estate plans prepared under prior laws may now provide an all or nothing approach that unintentionally disinherits some family members.
The changes described above also affect the interpretation of estate plans for persons which provide for the funding of GST trusts. Since there is no longer a GST tax, there may be no trust created specifically for future generations as intended.
Finally, the changes to federal laws may inadvertently generate state estate taxes for individuals who live in states which have retained or which reinstate a state level estate tax that operates independently of federal laws.
What does this mean for you? – We recommend that you have current documents reviewed to understand how these changes may have affected your plans. You also may have a limited window of opportunity to make gifts. For example, current gift tax rates are lower generally and gifts to future generations (grandchildren and beyond) are not currently subject to additional GST taxes. Although Congress may reinstate prior gift tax rates and GST taxes, you may still reap the benefit of gifting now if the new tax laws are not retroactive or depending upon your other individual circumstances.
Please contact us any time to discuss any of these unique gift planning opportunities or to set up a meeting to review your documents.