Posted On: January 5th 2010
The Economic Growth And Tax Relief Reconciliation Act of 2001 (known as EGTRRA) provided for a number of significant changes to the Estate and Gift Tax laws over time, culminating with the elimination of the Estate and Generation Skipping Transfer Tax (GST) effective January 1, 2010, and freezing the Gift Tax lifetime exemption at $1,000,000 with a maximum marginal rate of 35 percent. This legislation has now effectively eliminated the Estate Tax and significantly reduced the Gift Tax. However, the euphoria of no estate tax is destined to be short-lived, as EGTRRA also provided a “sunset” provision that causes the legislation to expire on December 31, 2010. As a result, these sweeping tax reductions are all temporary for the year 2010. On January 1, 2011 the Estate and GST tax will be reinstated to pre-EGTRRA levels with a much lower exemption of $1,000,000 and much higher marginal rates. The Gift Tax will keep its $1,000,000 exemption, but the rates will increase and once again be unified with the Estate Tax rates.
This seemingly monumental, albeit temporary, change in the law has created much distress amongst many advisors. The temporary nature of these changes creates an environment of uncertainty for estate planners and their clients. During 2009, a number of bills were introduced in Congress to provide for either a temporary or permanent extension of the estate tax; however, none became law. As a result, we now have a number of significant changes to the law in 2010 including: the repeal of Estate and GST transfer taxes, the highest marginal gift tax rate equal to the top individual income tax rate (currently 35%) and a new Carryover Basis regime with a $1.3 million per person basis step-up and a $3 million marital step-up.
These sweeping changes can also create problems with the current clauses in many existing estate planning documents. Even if a client does no new planning this year, their documents may be effectively outdated. Practitioners are now faced with helping clients create or change estate planning documents to deal with the current tax free regime, the return of the Estate and GST tax in some form and, most likely, much higher Estate and Gift rates by January of 2011 at the latest. Additionally, the Carryover Basis rules will require reviewing asset purchase records that date back many years. In some cases these records may be non-existent, creating problems in determining basis.
It is possible that Congress will enact a permanent extension of the Estate and GST tax in the early part of 2010 and make it retroactive to the beginning of this year. While a number of practitioners expect this, given the political implications of tax increases, there is always the possibility that Congress will do nothing in 2010, let the current law expire, and then have essentially increased taxes without having taken any action. With all the additional items on Congress’s agenda there seems to be a growing belief among some practitioners that this will be the case.
However, even if a retroactive law change is passed, the issues will not end there. In addition to the usual political implications associated with tax law changes, this case poses interesting constitutional arguments inherent with a retroactive law change which could be challenged in the courts.
Although practitioners may feel that a permanent extension is inevitable, the only certainty we currently have is the state of the law today. For now, there is no Estate and GST Transfer tax in 2010 and we find ourselves in the new Carryover Basis regime. While practitioners grapple with uncertainty, for many clients, this is an important time to revisit their overall estate and wealth transfer planning.