Developments of Interest

Estate Tax Reform.....Or Not?

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Congress failed to act in 2009 to clarify our current confusing and unfair estate tax system.  As we have discussed in our estate planning meetings and prior newsletters, in 2001 Congress passed an estate tax reform act, increasing the estate tax exemption in increments, attaining an exemption of $3,500,000 in 2009, and with total estate tax repeal in 2010.  However, the repeal “sunsets” in 2011, so that the estate tax returns in that year, with an exemption of only $1,000,000.  This results in drastically different estate tax consequences depending on the year of a person’s death.  We have hoped for Congressional action for a more reasonable system, but so far, no such luck.

Currently, there does not appear to be real Congressional enthusiasm for permanent estate tax repeal. There do appear to be several potential options for future Congressional action:

  • Pass a permanent (or one or two year) extension of the estate tax with the 2009 $3,500,000 exemption (or a higher or lower exemption) retroactive to January 1, 2010.  The retroactivity element could trigger constitutional challenges.
  • Restore the estate tax without retroactivity, so that there will be a gap period of no estate tax.
  • Fail to act so that there will be no estate tax for 2010.  Of great concern with failure to take action is the return of the estate tax exemption to the $1,000,000 level prescribed under current law.

For clarification, the “exemption” is the amount that can pass estate tax free from the decedent to persons other than a spouse or charity. Amounts passing to a spouse, or a properly drafted trust for a spouse, or to a charity, have long passed estate tax free, and there is no discussion of changing that.

Without further action, for 2010, all federal death taxes are repealed.  The generation skipping tax, as well as the estate tax, is eliminated.  The gift tax remains with a $1,000,000 exemption and a 35% maximum rate, reduced from 45% in 2009.

Along with the repeal of the estate tax this year, we have the elimination of the “step up in basis” of appreciated capital assets to the fair market value at the date of death.  The step up in basis to the fair market value at the date of death has long been beneficial to heirs who inherit appreciated capital assets.  In determining capital gain on sale of the inherited asset subsequent to death, the capital gain has been the difference between the sales price and the date of death value, rather that decedent’s’ purchase price, resulting in lower capital gain on appreciated assets. Now there is a “carry over basis” for appreciated assets, that is, the heirs receive the basis of the decedent.  There are two modifications: $1,300,000 may be added to basis, and an additional $3,000,000 may be added to basis of assets passing to a spouse or a qualifying spousal trust.  In 2011, if the estate tax comes back, so will the step up in basis.

For many clients, an estate tax system with a reasonable exemption of, for example, $3,500,000 to $5,000,000, (resulting in a combined exemption of $7,000,000 to $10,000,000 for a married couple with properly drafted documents), and a step up in basis on death for capital gains tax purposes, is more beneficial than total estate tax repeal and carry over basis.

Enclosed is an interesting article with more on these topics by Kathleen Pender from the January 10, 2010 San Francisco Chronicle.

So what is to be done now in face of this uncertainty?  Our particular concern is unintended distributions among heirs based on trusts with estate tax formulas that no longer exist, for example, documents providing for distribution of  the estate tax exemption amount to individuals, and the remainder to charity; or the estate tax exemption amount to children of a prior marriage (or in trust for the current spouse for life, then to children of a prior marriage) and the remainder to the current spouse; or the generation skipping tax exemption amount to grandchildren, and the remainder to children.  We have in the last several years developed techniques that allow us to draft trusts and wills to accomplish your intentions regardless of changes in the estate tax law and would welcome the opportunity to discuss them with you. 
Our recommendation is that you come in for a review of your existing will and trust if:

  • Your health is such that you have concerns that death may occur in the next several years.  Actually, it is always advisable for seriously ill persons to have a thorough review of their documents. 
  • Your estate plan splits your estate among groups of beneficiaries on an estate tax formula basis.
  • Your estate plan has not been reviewed for five years.
  • You have unrelated changes you wish to make or discuss. 

We understand that estate tax reform is a confusing topic exacerbated by Congress’ perplexing lack of action before 2010.  We are sending this letter to try to clarify the current situation as much as possible, and to let you know that we are monitoring the status of estate tax reform.

Estate taxes aside, we wish you and your family the very best for the new year.


Danville Office                          Napa Valley Office

Linn K. Coombs                          Robert M. Fanucci

Sarah S. Nix                                                      

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