Despite last minute efforts by Congress at the end of 2009, the estate tax has been repealed for one year - 2010. Thus, under current tax law, if you die in 2010 your estate will not be subject to federal estate tax. This one year repeal was set up by the 2001 tax cut legislation signed into law by President George W. Bush.
For years though, estate planning lawyers have written wills that typically pass all assets not subject to estate tax to children (in 2009, up to $3.5 million), with the balance passing to the spouse. With the repeal of the estate tax, if you die in 2010, you could be in the situation where all of your estate passes to your children and none to your spouse. A review of your current estate plan may be needed to make sure that what you intend to have happen in your will really does happen.
For the one year it will be repealed, the federal estate tax will be replaced by a capital gains tax on inherited assets using what are referred to as "carryover basis" rules. The carryover basis rules mean that, when an asset is sold, an heir will have to pay capital gain tax on the appreciation of the asset from the time it was acquired by the deceased family member. This contrasts with the step-up in basis, equal to the value of the asset at the time it is inherited, that heirs received in 2009 and prior years.
Current law calls for the federal estate tax to return in 2011, but with an exemption of only $1.0 million instead of $3.5 million. This lower exemption may cause estates of those who die in 2011 to unexpectedly pay estate tax.
Congress may enact legislation later this year to retroactively prevent repeal of the estate tax and the implementation of the carryover basis rules, but Congressional action cannot be predicted, some tax experts question whether retroactivity is constitutional, and the issue may be tied up in court for years to come. Thus, this uncertainty may be with us for quite some time.
To discuss the repeal of the estate tax and its impact upon your estate plan, contact Brian Balenson at 410.752.9737 or via email.