ALERT: Estate Tax 2010

The year is 2010 and the federal estate tax is officially repealed – for now.

If the intense political battle between the ultra-conservatives and most progressive liberals over the so-called “death tax” continues to drown out moderate hopes for permanent estate tax reform, the estate tax will resurge with a vengeance – starting in 2011, estates over $1 million will be subject to the federal tax which tops out at 55%.

Though there is no estate tax currently, there is a chance that Congress may enact reform and make it retroactive to the first of the year. Perhaps Congress will include an “opt-out” provision for decedents who pass between January 1st and the date the new reform is enacted. It is also possible that Congress will fail to act entirely, forcing a return to the 1996 estate tax laws that impose a tax with a top rate of 55% on estates over $1 million.

Unless and until Congress does act, here’s what we know:
1. There is no federal estate tax. Note that the repeal of the federal estate tax did not affect any state’s estate tax. In New Jersey, estates over $675,000 and in New York, estates over $1 million are subject to a state estate tax.
2. Heirs are subject to capital gains tax on the sale of inherited property to the extent that the sales price exceeds the decedent’s basis. For each estate, gain exceeding $1.3 million is taxable.

Since there is no federal estate tax, there is no federal credit shelter amount. Depending upon how your will is written, if you have a provision that automatically moves the “federal credit shelter amount” into a Credit Shelter Trust for the benefit of your surviving spouse with remainder to your surviving children, this Trust may not be funded – and your entire estate may be left to your surviving spouse, thereby missing appropriate planning opportunities. Further, your will may not adequately provide for the federal capital gains tax now imposed on estates or the state estate tax to which the estate may be subject.

Fortunately, there are some simple steps you can take now to update your plan and account for the uncertainty in the federal estate taxes and emergence of the capital gains tax on inherited assets. For example:
1. Work with your accountant to determine your (and your spouse’s) basis in your (and your spouse’s) assets; and
2. Ensure that your Executor/Trustee has the power to segregate your assets based on appreciation, so that highly appreciated assets may be treated specially in order to minimize the capital gains tax due and owing by the heirs; and
3. Maximize the state exemptions from state estate tax (i.e. $675,000 in New Jersey and $1 million in New York); and
4. Have an executable plan in place, whether Congress reforms the estate tax this year – or balks and forces a return to the $1 million exemption/55% top tax rate.

The repeal of the estate tax is not without consequences for the moderate estate. Experts suggest that if your estate is around $1 million, your failure to act at this important time will likely have expensive consequences for your estate. It is imperative that you speak with your advisers without delay, to determine the best course for you, your family, your business, and your estate.