Despite some last minute attempts by the Senate, the estate tax has been repealed effective January 1st, 2010. In the 2001 tax act known as EGTRRA, the estate tax exemption was increased and estate tax rates decreased over the span of 10 years, leading up to a full repeal of the estate tax in 2010. However, the 2001 act also included a “sunset” provision which eliminates all the changes in the act at the end of 2010. In other words, as the law stands now, the estate tax will be repealed for 2010 (gift tax stays in place at a $1,000,000 lifetime exemption and a 35% maximum marginal rate), and effective January 1st, 2011 the estate and gift tax law will revert back to law as it was in effect before the passage of EGTRRA (see the chart below). 

What will happen to the law?

There is quite a bit of speculation as to exactly what Congress will do with the estate tax. The House has already passed a bill that would permanently extend the current law ($3,500,000 estate tax exemption, 45% maximum marginal tax rate). The Senate was unable to reach agreement on a bill before the current session adjourned for the holidays. Hence we technically start the 2010 year with no estate tax. There have been indications that as soon as Congress is back in session that they will work on issuing a “letter of intent” alerting the public that they intend to extend or reinstitute some version of the estate tax retroactive to January 1, 2010. To add to the confusion, there are some legal analysts that question whether or not the retroactive imposition of an estate tax would be constitutional.

The Democrats have clearly indicated their intentions to reinstate the now repealed estate tax. Republican opposition, particularly in the Senate, is strong, which could spark a potentially lengthy debate. There has been no shortage of proposals ranging from making permanent the 2009 estate exemption and rates to increasing the exemption amount to as high as $5,000,000 per person (indexed for inflation), with a maximum marginal rate of 35% and spousal rollover of the unused exemption of a deceased spouse. In addition, while it did not seem likely a few months back, it is possible that Congress will simply allow the law to revert back to 2001 law. This would allow Congress to agree to disagree by taking a “hands off” approach to the situation and allowing the pre-EGTRRA law to return and take effect in 2011. 

What you need to know

There are several considerations in what, for now, is an estate tax free environment. However, the degree of urgency may vary depending on how your documents utilize formulas driven by either the estate tax exemption amount or the generation skipping tax exemption amount to make distributions.

Consider specifically the following two situations where immediate planning might be necessary:

• If you are married, and your revocable living trust document provides that upon the first death the estate tax exemption amount goes to someone other than your Surviving Spouse or a trust for his or her benefit (i.e. children, grandchildren, etc.), your documents should be reviewed to ensure that your Spouse remains protected.
• If your revocable living trust document provides that upon your death, or if married then upon the second death that the maximum generation skipping tax exemption available should either go to your grandchildren, or be held in trust for their benefit before any distributions or trusts are created for your children, your documents should be reviewed to make certain that your children will not inadvertently be disinherited for benefit of your grandchildren.

We will continue to keep you informed as Congress makes decisions and takes actions on this plan. Please feel free to contact PMFA's Estate Planning Team if you have questions or would like assistance with one of these transactions:  Dawn Jinsky in Southfield-West at dawn.jinsky@plantemoran.com, or Mandy Chardoul in Grand Rapids at mandy.chardoul@plantemoran.com.

 

Year	Top Estate and Gift Tax Rate	Estate Tax Exemption	Gift Tax Exemption	Step Up or Carryover Basis
2009	45%	$3,500,000	$1,000,000	Step Up
2010	Estate Tax and GST tax Repealed; Gift tax rate 35%	N/A	$1,000,000	Carryover
2011 and after	55% with a 5% additional tax for estates between $10 and $17.1 million	$1,000,000	$1,000,000	Step Up