As you may have heard the federal estate, gift and generation-skipping taxes, all of which are taxes on the transfer of assets from one generation to another, changed radically in 2010, when congress failed to pass legislation to preserve these taxes for 2010. This letter is intended to advise you of these changes and keep you up-to-date with current estate planning issues.
Planning in Uncertain times. Congress's failure to adopt estate tax legislation in 2009 and the possibility that changes will not be adopted during 2010, could radically change your estate planning considerations. Even if Congress does adopt legislation to carry the 2009 rules over to 2010, and makes them retroactive to January 1, 2010, the constitutionality of the retroactive legislation will most certainly be challenged.
In Ohio, proposed legislation is being drafted to basically have the rules that existed in 2009 apply to deaths in 2010. This may be a good temporary solution, but it is unknown if it will be adopted.
2010 Changes. The Ohio Legislature and Congress may do nothing in 2010, in which case there is an adjusted carryover basis, and no federal estate or Generation Skipping Taxes (GST) for people who die in 2010. Although the gift tax remains in place with a $1 million exemption, the maximum rate decreases for this year from 45% to 35%.
Those dying after any enactment should not have that uncertainty. In any event, your estate plan should contemplate dying both before, or after, a potential retroactive enactment.
What does this mean for you?
Not planning for these changes, if death occurs, can be disastrous. For example:
- Passing assets directly to your surviving spouse may result in higher estate taxes after 2010.
- Formula clauses (e.g. terms that allocated your estate exemption to a "by-pass trust") in your documents could inadvertently disinherit heirs and/or your surviving spouse and create conflicts among family members.
- Conflicts could arise among your heirs and fiduciaries on asset basis issues.
- Inadvertent taxes could be incurred after 2010 and inadvertent state taxes could be incurred as a result of out of date terms in your documents.
2011 Changes. Unless Congress enacts new legislation, then on January 1, 2011, a number of automatic changes will occur to the federal tax code, including:
The estate tax exemption drops, from 3.5 million in 2009, to $1.0 million per decedent in 2011.
The estate tax rate increases to 55% above $3.0 million and 60% above $10 million.
The former estate and generation-skipping taxes will be reinstated under the 2001 Tax Act with a $1 million exemption for lifetime and testamentary transfers and a $1 million exemption from generation-skipping tax.
States which remain "coupled" to the federal estate tax will have their state death taxes restored. If you own property in one of these coupled states, you could have new exposure to a state estate tax.
The fair market value step-up in basis returns for assets passing from a decedent.
The top income tax rates go up by at least 4.6%, capital gain tax rates go up by up to 5% and dividend tax rates go up by up to 24.6%.
It is important to review your documents periodically to ensure they reflect your current intent. In addition to the issues addressed in this letter, if you wish us to review your estate plan to see how this uncertainty may affect you personally, please call us to discuss and set up a meeting. Click here to find contact information for your Stark & Knoll attorney. You can also e-mail Stark & Knoll at info@stark-knoll.com or call 330-376-3300.