As surprising as it may sound, the federal estate tax and generation skipping transfer tax (GST) were actually repealed as of January 1, 2010. Individual states may continue to have separate estate or inheritance tax structures, but Idaho presently has not enacted such laws. The federal gift tax will continue in 2010 ($1,000,000 lifetime exemption and $13,000 annual exclusion). However, taxable gifts in 2010 will be subject to a maximum top rate of 35% gift tax rather than the 55% rate that will apply in 2011 if there are no legislative changes. For estates of individuals dying in 2010, the assets in the estate will be subject to carryover basis under complex basis allocation provisions (rather than receiving a “step up” in basis to date of death fair market value). There is much discussion about whether or not congress will have the authority to retroactively enact the estate or GST tax to January 1, 2010. Some scholars on the topic believe that a retroactive imposition of the estate or GST tax would be found to be unconstitutional.
I wanted to provide you with this update to enable you to guide your clients in appropriate circumstances. The following are some situations that your clients may consider:
1. If your clients have previously utilized any tax planning formulas in their estate documents (commonly referred to as the bypass trust or credit shelter trust), the actual construction and implementation of these clauses under present law is uncertain because most of these clauses are tied to provisions of the law that no longer exist. If an individual dies with these tax planning clauses in place and while the estate tax is repealed, it may create a situation where litigation will be required to judicially construe the provisions of the will or planning documents. I am recommending my clients review their existing documents and possibly adopt a codicil or trust amendment to confirm their intent as some clients may continue to desire the trust to be established for non-tax reasons.
2. Even if a client’s documents do not contain tax planning provisions, many documents were drafted without consideration of a carryover basis system. It may be appropriate for clients to review their documents and consider a trust amendment or codicil to provide directions to the fiduciary in allocating basis of assets of the estate. In 2010, the fiduciary can allocate up to $1,300,000 to increase the basis of assets and the executor can allocate up to $3,000,000 to increase the basis of assets passing to a surviving spouse or a QTIP trust.
3. The repeal of the estate and GST taxes has created an opportunity to make larger transfers to children and grandchildren at lower cost. Any gifts will remain subject to the lifetime gifting exemption of $1,000,000 or the $13,000 annual exclusion. However, any taxable gifts will be subject to gift tax at the current rate of 35%. There would presently be no limit on transfers to grandchildren or trusts for grandchildren or other descendants because as of this writing there is no GST tax. Although there is no certainty that the gift tax rate will remain at 35% or that congress will not attempt to retroactively impose a GST tax, if your clients are interested in such transfers it is recommended the gifts be made as early in 2010 as possible to take advantage of the current lower gift tax rate and the repeal of the GST tax.
4. It is anticipated that any tax changes in 2010 may eliminate or change the rules on valuation discounts that may be applied to family limited partnerships or business interests. If a client desires to take advantage of valuation discounts, the transfer should be considered as early in 2010 as possible.
5. If a client is the beneficiary of a marital trust that will be taxed upon his or her death (if the estate tax is then in effect), a planning possibility is to have the trustee make significant distributions to the client and then have the client makes gifts to children and grandchildren to take advantage of the lower 35% gift tax rate and possibly escape the GST tax.
If you would like to review any of this information further, please let me know. Best wishes for a healthy and prosperous 2010.
Sandra L. Clapp
Sandra L. Clapp & Associates, P.A.
1025 S. Bridgeway Pl, Suite 180
P.O. Box 2660
Eagle, Idaho 83616
Telephone: (208) 938-2660
Facsimile: (208) 938-2674
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