In my holiday weekend roundup earlier this week, I mentioned the "temporarily disappearing estate tax." On that topic, below is an advisory we are sending out to clients this week:
As you may have seen in the popular press, Congress adjourned last month without definitively addressing the transfer tax provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 applicable to years 2010 and beyond.
As we enter the new year, the result of this inaction is that Federal estate and generation-skipping transfer ("GST") taxes are repealed for the year 2010. In 2011, these taxes will be restored as they were in 2001; namely, with a top rate of 55%, an estate tax exemption of $1 million and an indexed GST exemption of $1.1 million. (By contrast, in 2009 each tax was levied at a flat 45% rate on transfers in excess of a $3.5 million exemption.)
The Federal gift tax will remain in effect in 2010 but at a maximum rate of 35% (as opposed to the 2009 top rate of 45%) and with a continued $1 million exemption. In 2011, the top gift tax rate will also revert to 55%, with a continued $1 million exemption.
Concomitant with the temporary repeal of the Federal estate tax, the automatic "step-up" in income tax basis for inherited property will no longer be available with respect to property received from decedents dying in 2010. Instead, heirs will receive a modified "carry-over" income tax basis in such property. In 2011, we will revert to the automatic "step-up" in basis regime.
The legislative debate over Federal transfer taxes is expected to continue after Congress returns from recess this month. We may also see debate in Albany as the New York legislature is asked to address important New York State estate tax issues raised by the temporary repeal of the Federal estate tax. It has been suggested that any state or Federal legislation passed this year may take effect retroactively, perhaps as of January 1, 2010.
While we hazard no guesses on the contours of any new law, be assured that we will be closely monitoring all developments.