Time to Review Your Estate Plan: A 2010 Estate Planning Update

Posted on March 17, 2010


The Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRA”) repealed the federal estate tax effective January 1, 2010.  This “repeal,” however, only lasted for one year.  Without Congressional action, the federal estate tax returns to 2001 levels.  It was assumed by most that Congress would act at some point prior to the repeal date to adopt a permanent solution to the estate tax.  However, Congress has failed to do so thus far, resulting in (currently) no federal estate tax in 2010—with the estate tax set to return in 2011.

Even though Congress did not pass a bill addressing federal estate tax repeal during 2009, members of Congress have indicated that consideration of such taxes will be a priority in 2010. It has also been reported that some of the proposed bills will have an effective date retroactive to January 1, 2010. However, if Congress enacts retroactive legislation, there will certainly be a wave of litigation surrounding the constitutionality of such behavior.

Currently, for a decedent dying in 2010, the estate has an unlimited federal estate exemption. Thus, no estate of a decedent dying in 2010 would pay any federal estate tax. However, as discussed above, if Congress does not act, the federal estate tax exemptions will return to $1 million and the maximum federal estate tax rate will return to 55% in 2011.

In addition, the assets of a decedent who dies in 2010 would not receive a full step-up in basis to the date-of-death value of the assets. Instead, these assets would be subject to the “modified carryover basis” rules, under which the basis would be equal to the lesser of the decedent’s adjusted basis in the assets or the fair market value of the assets on the date the decedent died. As a result, it is possible that the basis of an estate’s assets could be stepped down. Again, unless Congress acts, the basis step-up rules applicable prior to 2010 are set to return in 2011.

For 2010 and 2011, the individual lifetime gift-tax exemption remains unchanged at $1 million. However, for 2010, the maximum federal gift tax rate has decreased to 35%. In 2011, the maximum federal gift tax rate will increase to 55%.

Because of these legislative changes, now is the time to act. While the federal estate taxes are repealed during 2010, the estate plans of individuals may no longer fully reflect their intentions. For example, an individual’s estate plan leaving “that amount which could pass free of the federal estate tax” to the individual’s children, and leaving the balance to his or her spouse, may unintentionally disinherit his or her spouse because the amount that could pass free of the federal estate tax to the individual’s children would be the individual’s entire estate.

Under the circumstances, individuals may want to take steps to review and adjust their estate plans to ensure that their plans are up-to-date with both their objectives and current law.

Please contact Russell M. Cunningham, IV or Brice M. Johnston at (205) 328-9445 for more information.