ALERT: What The Repeal Of The Federal Estate Tax Means To You (Besides Lower Taxes)


by Jon Grob

Grob, Jonathan
jgrob@mcgrathnorth.com
(402) 341-3070

Under tax legislation enacted in 2001, the federal estate tax was to be repealed for one year, 2010, and automatically reinstated January 1, 2011, with only a $1.0 million federal estate tax exemption allowed for a deceased individual. It was anticipated by nearly all informed observers that Congress would pass legislation by 2009 to address the one year repeal. Although the House passed a bill last December, the Senate did not. Hence, for the time being, there is no federal estate tax. Although Democratic leaders in Congress have stated that the estate tax will be reinstated retroactively, based on Congressional inaction over the last eight years, this may be problematic.

It is also uncertain how the provisions of many estate plan documents will be interpreted if there continues to be no estate tax. This is because many estate plan provisions are phrased in terms of tax concepts, such as the estate tax exemption amount and marital deduction. In addition, estate planning documents may also set forth charitable formula bequests that were drafted with the intention that there would be some federal estate tax. However, because those federal estate tax concepts are not in the law this year, there may be some question as to what estate plan documents mean and how property is to be disposed of after death.

The Nebraska legislature is considering a state law that would impact the interpretation of those estate plans. The proposed bill requires that to the extent an estate plan references the federal estate tax exemption amount, the plan provisions should be interpreted as the law existed in 2009 (i.e., as if there is a federal estate tax exemption amount of $3.5 million). The proposed bill does provide, however, that this rule of interpretation does not apply where the decedent sets forth a clear contrary intent.

Another change that Congress’ inaction is causing this year relates to the income tax basis of inherited assets. Under the law through 2009, the income tax basis of an asset was “stepped up” or “stepped down” to its fair market value when its owner died, as a general rule. But for individuals dying in 2010 (at least until Congress acts to change the law), the automatic change in basis may not occur. Rather, the deceased owner’s income tax basis in assets will generally “carry over” to the persons who inherit the assets, subject to adjustments to reflect the current value of some assets. Generally, basis may be stepped up to the extent of embedded gain up to $1.3 million, plus an additional $3.0 million with respect to assets passing to a surviving spouse. As a result, for high net worth individuals, it may be appropriate for estate planning documents to be revised in order to take into account the possibility of carry over basis.

Further discussion on the principal implications and frequently asked questions raised by the 2010 repeal can be found here:  2010 Congressional Malpractice.

In light of this uncertainty, individuals who could potentially have a taxable estate or also have provisions dependent on now repealed estate tax law definitions should contact their tax counsel for assistance as soon a possible. The members of our firm’s Tax Practice Group would be pleased to serve you.

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