Estate Tax Law 2010 and Beyond

The year 2001 may be a faint memory, but it was a very important year for estate tax law. The passage of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) set in motion a decade of regular estate tax changes. We, along with many estate tax attorneys, never expected to see this current estate tax environment in 2010. Most expected Congress would act in advance of 2010, approving a permanent estate tax law. However, Congress has failed to act, leaving attorneys, financial planners and individuals with little guidance.

2009 Estate Tax Law

To obtain an understanding of the 2010 estate tax law, let’s first review the law in 2009. Under 2009 law, each person could pass up to $3.5 million (estate exemption) to anyone other than a spouse without incurring any federal estate taxes. An unlimited amount could pass to one’s spouse without any estate tax. In 2009 the top federal estate tax rate was 45%, down from 55%

The year 2001 may be a faint memory, but it was a very important year for estate tax law. The passage of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) set in motion a decade of regular estate tax changes. We, along with many estate tax attorneys, never expected to see this current estate tax environment in 2010. Most expected Congress would act in advance of 2010, approving a permanent estate tax law. However, Congress has failed to act, leaving attorneys, financial planners and individuals with little guidance.

Estate Tax Law 2010 and Beyond

Due to EGTRRA, politicians in 2001 were able to gloat that they repealed the estate tax. However, on December 31, 2010, EGTRRA is set to expire, and estate tax law will revert back to the law that existed in 2001. As mentioned above, the 2009 estate exemption was $3.5 million and the top estate tax rate was 45%. In 2010, the estate exemption is unlimited and there is no estate tax. However, unless Congress acts, estate tax law in 2011 will be what it was in 2001: a $1 million estate exemption with step-up in basis rules and a top tax rate of 55%.

One controversial aspect of the 2010 estate tax law is that it replaced the step-up in basis rule with what is known as modified carryover basis. Under modified carryover basis, a beneficiary of a decedent’s estate receives property with an adjusted basis equal to the lesser of the decedent’s basis or the asset’s fair market value at the date of death. This modified basis could cause many beneficiaries to be subject to higher capital gains taxes.

To make things even more complicated and to offset this negative aspect of carryover basis, the law permits the personal representative of the estate of the decedent to increase the basis of the estate by $1.3 million in the aggregate on an asset by asset basis. Assets left to a spouse receive an additional $3 million in basis adjustment.

Conclusion

Most estate planning attorneys are taking a “wait and see” approach before reaching out to clients to make estate document changes. Based on conversations with estate attorneys with whom we work, most estate documents should accomplish your objectives under the current 2010 estate tax law.

Keep in mind that the only reason a person would be subject to the current law is if an individual dies in 2010. As with any proper planning, if an individual is gravely ill or there is a high probability that the individual may die this year, we recommend contacting us and the estate planning attorney to review the documents. For the majority of individuals, we recommend the “wait and see” approach with an expectation that Congress will enact permanent estate tax law changes in 2010 or early 2011. At that time further revision of your estate documents may be warranted.

If you have any questions, please don’t hesitate to contact us. If you’re not currently a client, but would like to schedule an appointment, please contact Lisa Reynolds at (513) 792-6648 or [email protected].

Truepoint Wealth Counsel is a fee-only Registered Investment Adviser. Registration as an adviser does not connote a specific level of skill or training. More detail, including forms ADV Part 2A & 2B filed with the SEC, can be found at TruepointWealth.com. Neither the information, nor any opinion expressed, is to be construed as personalized investment, tax or legal advice. The accuracy and completeness of information presented from third-party sources cannot be guaranteed.

We’d love to get to know more about you and
share with you how we can best help you.