2010 Tax Law

   ESTATE PLANNING

Congress repealed with its failure to enact new tax legislation the federal estate tax and generation skipping tax [GST].

 This pertains to estate transfers for deaths occurring in calendar year 2010, a one year time period. 

Gone are the unified credit exemption and unlimited marital deduction as well as unlimited charitable deduction. 

In the most simple of terms, a capital gains tax has been substituted for the estate tax. The cost basis adjustment rules have also been modified so that the carry over basis, similar to gifts, will be the lesser of the market value or descendant's adjusted basis for inherited property.

Thus the step up in basis is no longer law except for $1.3M of estate property acquired “from a decedent” and an additional $3M basis increase for “qualified spousal property.” 

For legacy transfers for death occurring on and after January 1, 2011, the estate and GST tax return with a lower, $1M applicable exclusion amount. The federal estate tax rates will be from 41% to 55%. The GST Exemption will be $1M. With inflation adjustment it will probably be $1.3M with a GST transfer rate of 55%. The transfers will be valued at stepped up cost basis.

In normal time, a legislative fix could be in place and the 2001 Tax Act $3.5 million exemption temporarily extended pending new legislation. There are not normal times and so far at least the national parties find no consensus for such a fix. 



TRUST PLANNING

Derailed by more important matters in 2009, Congress failed to prevent the repeal of the estate tax for 2010 only. Next year in 2011, the estate tax is reinstated with only a $1 million exemption, unless Congress acts in 2010. 

There is talk that Congress may even retroactively reinstate the estate tax sometime in 2010. 

Estate tax repeal could hurt the surviving spouse of someone dying in 2010 if the couple has a Marital Trust/Bypass Trust Plan (also known as an A/B plan), as the wording of the documents may leave all the assets to the bypass trust, cutting out the surviving spouse.

The second tax law change introduces new IRC Section 1022, which replaces former IRC Section 1014. New Section 1022 curtails the stepped-up tax basis for capital assets acquired from a decedent.

Many read Section 1022 to only allow a step-up for property acquired from a decedent, for revocable trusts, jointly held property, and community property. 

Some believe Section 1022 denies a step-up for life estates, all irrevocable trusts and all retained and granted powers of appointment. 

On the other hand, other NAELA tax practitioners believe that certain irrevocable grantor trusts and life estates will still receive a stepped-up basis. 

Information from and Citation to NAELA Tax Section memo. Richard Mayberry is a member of the National Association of Elderlaw Attorneys or "NAELA" and the ElderCounsel. Mayberry was also former Chair of the Elder Law Committee of the Bar Association of the District of Columbia.