There is no Estate Tax or Generation Skipping Tax under current law for one year beginning Jan. 1, 2010.
The Gift Tax Rate for gifts in excess of $1 million has been reduced to 35 percent for 2010.
Carryover Income Tax Basis rather than Value at Death Rules will apply in 2010.
The changes occurred automatically pursuant to the terms of the Economic Growth and Tax Relief Reconciliation Act of 2001 (2001 Tax Act). At the time of the passage of these provisions of the 2001 Tax Act, most commentators believed that the 2001 Tax Act would be amended before Jan. 1, 2010. Because the attention of Congress was focused on national healthcare and the economic recession, the 2001 Tax Act was not amended in 2009.
It is certain that retroactive amendment will be attempted by Congress in 2010, and the Senate Finance Committee Chair has stated that Congress will "clearly work to do this retroactively." The chief house counsel for the House Ways & Means Committee has expressed his opinion that a retroactive bill may be unconstitutional. It is likely that any amendment containing a retroactive provision will cause litigation to be filed challenging the constitutionality of retroactivity for transactions and deaths that occurred before enactment. In addition, there is partisan debate over the substantive terms of amendment, with Republicans seeking a higher exemption and lower rate, and Democrats seeking to extend the $3.5 million exemption and the 45 percent rate in effect in 2009. If there is no amendment in 2010, the 2001 Tax Act reinstates the estate tax in 2011 with an exemption amount of $1 million, not $3.5 million, and a maximum tax rate of 55 percent.
There is no clear answer for clients with regard to their current estate plans. Many wills contain formula bequests, either to a marital trust or a by-pass trust, and the law as of Jan. 1, 2010 may create ambiguity with regard to interpretation of some of those formulas. We strongly recommend that each client review their individual wills and estate plans, particularly with regard to formula bequests. In addition, individuals with substantial estates may consider taxable gifts to grandchildren because of the possible dramatic tax savings under the law as of Jan. 1, 2010, if a retroactive amendment is not effective.
If you would like more information or would like to review your estate plan, please contact an attorney in the Trusts and Estates section of Gardere Wynne Sewell LLP in Houston or Dallas to schedule an appointment.
IRS CIRCULAR 230 DISCLOSURE:
This communication has not been prepared as a formal legal opinion within the procedures described in Treasury Department Circular 230. As a result, we are required by Treasury Regulations to advise you that for any significant Federal tax issue addressed herein, the advice in this communication (including any attachments) was not intended or written to be used, and it cannot be used by the taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer.