Topics of Interest

Status of Federal Estate Tax and Generation-Skipping Tax

Due to a Congressional stalemate, the Federal Estate Tax and Generation-Skipping Tax (the “GST”) have been temporarily repealed for one year (assuming no remedial legislation), beginning on January 1, 2010 and ending on January 1, 2011.  The following is a summary of what you should be aware of:

  • For one year, beginning on January 1, 2010, there is no Federal Estate Tax or GST.  The Gift Tax will remain in place, providing for a lifetime Gift Tax Exemption of $1 million with a tax rate of 35% on taxable gifts in excess of $1 million.
  • Essentially, the Federal Estate Tax has been replaced with a complicated “capital gains” tax system which is also known as the “modified carryover basis regime.”  There will no longer be an automatic step-up in basis for estate assets.  A “step-up in basis” means that beneficiaries of the Estate may use the date of death value as the tax basis on inherited assets which are then sold.  Therefore, the “gain” for purposes of the capital gains tax is determined from the value of that asset on the date of death.  A “carryover in basis” means that the tax basis of an inherited asset would be determined by referring to the value on the date the asset was originally purchased.In 2010, the basis of assets acquired from a decedent will be determined by an allocation of the Executor.  The Executor can allocate up to $1.3 million to increase the basis of assets passing to beneficiaries other than the surviving spouse.  The Executor can also allocate up to $3 million to increase the basis of assets passing to a surviving spouse.  If the Executor chooses, he/she may increase the basis by the entire $4.3 million (the $3 million plus the $1.3 million) on assets passing to a surviving spouse; however this would preclude all other beneficiaries from adjusting the tax basis on inherited assets at all.  Essentially this makes determining the tax basis on inherited assets a formidable task for the Estate.
  • On January 1, 2011, the Federal Estate Tax is scheduled to be reinstated at a rate of 55% on estates valued at $1 million.  The GST will also be reinstated with a $1 million exemption.  The highest tax rate for both will be 55%.
  • Congress will likely reinstate both the Federal Estate Tax and the GST during 2010 and then attempt to have these taxes apply retroactively starting back to January 1, 2010. This “retroactive” application will be challenged on Constitutional grounds and the case will likely travel all the way up to the United States Supreme Court.  One reason that there was a Congressional stalemate at the end of 2009 is that the House of Representatives agreed on and passed a Bill freezing the Federal Estate Tax at 2009’s rate, but the Senate would not sign on to that Bill and did not move toward proposing a compromise.

We recommend that no hasty assumptions be made about death and taxes in 2010.  Our best advice is not to die until this issue is resolved.  As always, we shall keep our clients informed of any legislative changes in a prompt and timely manner.  Please feel free to contact Steven M. Schanker, Esq., R. Mark Hochberg, Esq., or Andrea B. Schanker, Esq. at 631 424-5400 for more information.

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