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Tax season is, once again, just around the corner.  And while for many Boomers, preparing your income tax returns may seem like the more pressing concern, anyone who’s read any of my articles or blog posts lately knows that there’s another, equally (if not more) pressing tax issue that every Boomer should be concerned with – the radically changing Federal Estate Tax!  The Federal Estate Tax rules changed significantly in 2010, and will change yet again in 2011 unless Congress passes new legislation.

Here Are The Facts:

2001:  In 2001, Congress passed the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) which provided for significant phased-in increases in the federal estate, gift and generation skipping tax (GST) exemptions and lower tax rates.

2009:  In 2009, the estate and GST exemptions increased to $3.5 million per decedent, with a flat 45% estate and GST tax rate on any excess. The gift tax exemption was $1.0 million, with tax rates from 41% to 45%.

2010:  Estate planning practitioners fully expected Congress to carry the 2009 estate tax rules across 2010.  However, this highly anticipated push failed and the 2009 estate tax legislation expired.  Thus, effective as of January 1, 2010, there is no federal estate or GST tax. (The gift tax $1.0 million exemption did remain, with a lower flat tax rate of 35%.)   However, there is carryover basis, which could cost your heirs more than if there was an estate tax.

2011:  Left untouched, in January 1, 2011, EGTRRA will be automatically repealed, resulting in an odd situation: A $3.5 million estate and GST exemption and flat 45% estate tax rate in 2009, no estate or GST tax in 2010, and a $1.0 million estate and gift tax exemption and tax rate of up to 60% in 2011.

Things to Consider:

Congress’s failure to adopt estate tax legislation in 2009 and the looming possibility that changes may or may not be adopted during 2010, radically change the estate planning considerations of many clients. 

If Congress Does Not Act:  If Congress does nothing this year, the carryover basis regime will expire on December 31, 2010.  Consequently, your existing documents will be fully effective to minimize Federal estate taxes once again on January 1, 2011.  That said, if legislative action does not occur and you were to die in 2010 having left behind estate planning documents prepared for pre-2010 law, your beneficiaries could be gravely disappointed with the results as those documents may not function properly.  Pre-2010 documents were drafted to minimize Federal estate taxes, not the capital gain taxes created by the carryover basis regime.  The result will be increased income taxes and, in some cases, assets passing to unintended beneficiaries.

If Congress Does Act:  Congress may adopt legislation to carry the 2009 rules over 2010, retroactive to January 1, 2010. There is broad disagreement on whether a retroactive tax bill would be constitutional. If a retroactive law is adopted, it will be challenged as unconstitutional and it could take years for the Supreme Court to rule on the issue. Your estate plan should contemplate dying both before or after a potential retroactive enactment, which may or may not be constitutional.  Other possible moves Congress could make:  Adopt permanent estate tax exemption beginning in 2010 or 2011 (whereas estate tax exemptions could fall between $2-5.0 million and tax rates 35% to 45%), adopt a temporary higher estate exemption and/or adopt rules to limit or eliminate valuation discounts.

The Bottom Line

Confusion over these uncertain estate rules, coupled with depressed asset values, has created an environment where many people are not moving forward with their estate planning, as they wait for Congress to make another law.  I have always strongly advised that estate plans be reviewed and updated every four years, or sooner after major life events (death, marriage, new children, etc.) occur.  Same goes for a change in Federal or State estate tax laws, such is the case for 2010.

Not everyone will necessarily require action, however, it’s best to be on the safe side to ensure that your estate planning documents are as current and tax efficient as possible.  I encourage you to schedule a time with an experienced estate planning attorney to review your current plan and determine what, if any, changes need to be made to minimize taxes and to reduce the possibility of future family conflicts in these chaotic times. 

For regular updates on changes to the Federal Estate Tax, follow our estate planning blog, Altman Speaks.

You may respond to Gary below or email him at galtman@boomer-living.com or gary@altmanassoicates.net. 

Tags: boomer, federal estate tax, gift tax exemption, income tax returns, new legislation

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