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2010 is an unusual year for estate planning. As of January 1, 2010, the federal estate and generation skipping transfer (“GST”) taxes have been repealed. If Congress fails to enact new legislation, the repeal of the federal estate tax will be in effect for 2010 only. On January 1, 2011, the federal estate tax will be reinstated at a threshold of $1,000,000 (you may recall that the 2009 threshold was $3.5 million). Importantly, the $1,000,000 Oregon inheritance tax has not be affected by the federal rules and remains in effect.
This current federal estate tax disparity between 2010 and 2011 took many tax practitioners by surprise because many practitioners assumed (wrongly) that Congress would either make the 2009 estate tax rules permanent ($3.5 million threshold) or temporarily extend the rules until a higher exemption threshold could be agreed upon. However, there is now considerable uncertainty about whether Congress will address this issue by enacting legislation to reinstate the federal estate and GST taxes retroactively or simply ignore the matter until the taxes spring back into effect next year.
Bad News About Basis
The “step up” basis rules (inherited assets receive a new cost basis for income tax purposes equal to their fair market value at an individual’s death) have been temporarily replaced with a modified “carry over” basis system. Under the new carry over basis rules, inherited assets retain their lifetime basis, except that there is a limited opportunity to step-up the basis in certain assets. Because of these rules, clients are strongly encouraged to create and maintain accurate records of the cost basis (generally the purchase price) of their assets.
How does this confusion affect your estate plan?
The estate plans of many married couples have been designed to minimize the federal estate tax imposed on the transfer of wealth to their children and other heirs by dividing the estate of the first spouse to die into two shares. One share holds an amount that can be exempt from federal estate taxes. This share is generally held in trust (“Family Bypass Trust”) for the benefit of the surviving spouse and, in some cases, descendants. The other share passes to the surviving spouse or a trust for the surviving spouse’s benefit. If the first spouse dies while no federal estate tax or GST tax is in place, the division between the two shares may be unintentionally skewed or one share may be eliminated since the amounts directed into the shares are tied to federal laws that have been repealed. In some blended family situations, where the identity of the ultimate beneficiaries of the two shares are different, this may unintentionally favor one side of the family.
Armed with all of this information, individuals and couples with taxable estates may decide to take a “wait and see” approach. Hopefully, over the next few months, Congress will pass legislation that will resolve the confusion and changes can then be made to the estate plan, if appropriate or necessary. Those concerned about the impact of the federal estate tax laws on their estate plan, should feel free to [contact us] to schedule an appointment.
We expect these issues to generate much debate this year and necessitate more changes to the federal estate tax laws. As always, we will try our best to keep you informed!
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