The Federal Estate Tax is set to expire in January, 2010. Over the last eight years, this tax has been phasing out, with exemption amounts increasing and tax rates decreasing each year. This phase out of the Federal Estate Tax was part of the 2001 Economic Growth and Tax Relief Reconciliation Act.
While the Federal Estate Tax will be entirely repealed for individuals dying after 2009, the repeal of the Estate Tax will sunset after 2010. At that time, the tax rates and exemption amounts will revert to the 2001 amounts unless Congress takes action to continue the repeal. If Congress does not pass legislation to continue the repeal, the estate tax will be repealed only for those who die in 2010. Unlike the estate tax, the gift tax is not being repealed during 2010. It will remain in effect, with a top gift tax rate of 35 percent. Under the sunset rule, the top estate and gift tax rate would revert to 55 percent in 2011. The estate and gift taxes would be re-unified in 2011, with the exemption returning to $1 million for both estate and gift tax purposes.
Numerous bills have been introduced in the House to address the estate tax exemption before it sunsets. Based on the political and economic climate, it is likely that the estate tax exemption will be frozen at $3.5 million for a couple of years and the rate will remain at 45 percent.
Hopefully, a longer-term solution will be approved; however, it currently looks like a short-term patch will be applied until a long-term resolution can be reached. The option of portability of the exemption between spouses has also been proposed. This means that when one spouse dies and all assets pass to the surviving spouse, the surviving spouse may have an exemption of $7 million. The passage of the portability of the exemption is not likely to occur immediately; however, the lock-in of the rate will likely occur. Further, the gift tax will be re-unified with the estate tax and the step-up in basis will continue. Additional changes that may come into play are the elimination of short term Grantor Retained Annuity Trusts and no discounts for intra-family transfers of family entities.
The uncertainty of whether the sunset provision will ever come into play and whether an individual will die during a period of increasing exemption amount make planning difficult. Because of the way the law works, when income tax costs are factored in some heirs would actually face higher tax costs if their benefactor dies in 2010, when the estate tax is scheduled to be repealed, than they would if he or she had died before 2010.
Given the proposed changes in the estate and gift tax laws, it is important to have your estate plan reviewed. Although the uncertainty of changes to the estate tax law presents planning challenges, an estate-planning professional can help you keep your heirs’ estate and income taxes to a minimum. For more information on wills and estate planning for 2010 and after, including Record Retention, Special Factors for Married Couples and Special Needs, Gift Tax, and the New Jersey Estate Tax Exemption, visit the “Articles” page of our website at www.szaferman.com.
Benjamin T. Branche, Esq. is an attorney at the law firm of Szaferman, Lakind, Blumstein & Blader, P.C., 101 Grovers Mill Road, Lawrenceville, 08648. He concentrates in tax, trusts and estates, and business law. He can be reached at bbranche@szaferman or by phone at 609-275-0400.