Estate Tax Chaos
It now appears very likely that we will begin the new year with no Federal estate tax in place. A law passed in 2001 repealed Federal estate taxes for the year 2010. That same law provided that the estate tax would reappear in the year 2011 with a $1 million exemption amount and a top rate of 55%.
Congress has known about this anomaly for the last 8 years. There has been universal agreement that the law needed to be amended in some fashion. Nevertheless, the law has not been changed because Congress could never agree on how to change it.
One group of legislators wants to permanently repeal estate taxes. Another group wants to retain estate taxes with a higher exemption amount than $1 million. It is widely predicted that Congress will address this issue early in 2010 and perhaps reinstate estate taxes effective as of January 1, 2010. An attempt to enact a retroactive tax might be a violation of the United States Constitution. There is some precedent suggesting that a retroactive tax would be allowed if enacted.
There is another significant issue for persons dying in 2010. Assets will no longer receive a basis equal to the date of death value of the assets, which is current law. Instead there will be a "carryover basis" regime, with the ability to obtain a "step-up" in basis for a limited amount of assets. A similar regime was briefly enacted in the 1970s, and was repealed almost immediately because it was so impractical. It is very difficult to establish the historical basis of inherited assets. Additionally, heirs of many estates that would not have been required to pay Federal estate tax under current law will now have to pay capital gains taxes when they sell inherited assets.
Planning your estate amidst this uncertainty is challenging. You need to be prepared for the law that is on the books, i.e., a federal exemption of only $1 million per person in future years. You also need to make sure that your Will will work in the manner intended if you die during the year 2010. In particular, you need to review any formulas in your Will that are based on an estate tax system that may not exist at the time of your death.