Substantial changes to the federal transfer taxes accompanied the arrival of 2010. The federal estate, gift and generation-skipping taxes, all of which are taxes on the transfer of assets from one generation to another, are dramatically different for this year because Congress did not pass any legislation in 2009 to preserve these taxes for 2010.

As of January 1, 2010, there is no federal estate tax for the estates of decedents who die in 2010. In addition, there is no generation-skipping tax (GST). Although the gift tax remains in place with a $1 million exemption, the maximum rate decreases for this year from 45% to 35%.

Assets held in estates of decedents dying in 2010 are subject to complex carryover basis rules with $1.3 million in basis that can be allocated to assets plus $3 million more in basis for assets transferring to a spouse. These allocations are elections to be made by the executor of the estate.

Unless Congress acts, the former estate and generation-skipping taxes will be reinstated under the 2001 Tax Act with a 55% rate, a $1 million exemption for lifetime and testamentary transfers and a $1 million exemption from generation-skipping tax (as indexed for inflation since 1999). The House has already approved a bill that would make permanent the estate and GST ($3.5 million) and gift tax ($1 million) exemption along with a 45% maximum rate (H.R. 4154).

If Congress does act and the legislation enacted is retroactive, constitutional challenges are anticipated. Planning under these circumstances is extremely complex. We will keep you apprised of new developments as they occur in this interesting but unclear estate planning environment.

For more information please contact Mary Jo Lockshin, or your Stark & Knoll attorney, at 330-376-3000 or info@stark-knoll.com.