Monthly Tax Tips
Uncertain estate and gift tax law may impact your estate plan
One of the effects of last year's focus on health care reform was that Congress adjourned for its 2009 Christmas break without dealing with the temporary repeal of the estate tax. The temporary repeal took effect on Jan. 1, 2010, as a result.
While we still expect our representatives in Washington to eventually reinstate the 2009 estate tax rules at some point during 2010 (perhaps even retroactively), there is a possibility that they won't.
Since Congress couldn't agree during 2009, there can be no certainty that they will be able to during 2010 (note that 2010 is an election year). Meanwhile, wealthy people will die and there will be confusion as to what laws will apply.
The confusion will extend beyond estate taxes into the income tax arena, as the rules for determining the gain or loss on the sale of inherited assets are also impacted. If Congress does approve a retroactive law, the retroactive portion will probably be challenged in court and the result will not be known for years. The more time that passes without congressional action, the less likely it becomes that any legislative fix will be retroactive to Jan. 1.
If Congress does not act during 2010, on Jan. 1, 2011, the old estate tax regime will return with the higher tax rates and lower exemption levels that applied at the beginning of the last decade.
Dealing with this situation is challenging at best; even for professionals. Nevertheless, here is some advice that may apply to you.
Estate plan review
With the temporary repeal, many areas of the estate and gift tax law are not applicable for 2010. Since most estate plans for people with significant property are heavily based upon estate tax rules, there are a lot of terms in these plans that are defined by reference to that law. You may want to have your lawyer take a look at your plan to see how it would work in the current legal environment. This advice is particularly important for the very elderly or those with life-threatening illnesses.
Gifts to life insurance trusts
If you have a life insurance trust to which you make gifts each year (or more frequently) for premium payments, there is a good chance that part of your exemption for generation-skipping tax gets allocated to the trust in an amount equal to the gifts. With the current state of the law, there is a lot of confusion as to whether any of this exemption can be allocated during 2010. Standard advice in this situation is to structure the trust contributions currently as loans to the trust instead of as gifts. You should discuss this with your estate planner or other tax adviser to see if it makes sense in your circumstances.
Basis rules
Part of estate tax repeal was a partial repeal of one of the most prized benefits of having an estate tax system. That benefit is the rule that allows a full adjustment of the tax basis of property to fair market value on the date of death. Often, this rule would eliminate substantial potential capital gains at the same time that no estate tax was payable because of the estate tax exemption or the marital deduction.
Replacing full adjustment of basis with a system that allows adjustment for only part of the property owned by the deceased, depending on the size of the estate, means that the current basis of the property becomes much more important. It will be much easier for this to be determined and documented before death than afterwards. For example, if you have real estate that you have owned for many years, you should try to determine what documentation you can assemble to support your tax basis.
If you or your spouse has a life-threatening illness and you own significantly appreciated property, you are well-advised to seek a revisiting of your estate plan with your planner because of the possible application of the new tax basis rules. There may be a benefit to retitling some of property between husband and wife
Taxable fifts
Some people have used up their full $1 million lifetime taxable gift exemption and they are still making taxable gifts for the benefit of children. Gifts in excess of the annual amount allowed, currently $13,000 per gift recipient, are considered taxable gifts. Under current law, the tax rate that applies to such gifts is 35% of the taxable amount. If the 2009 law is reinstated by Congress later this year, as discussed at the beginning of this article, this tax rate will be 45%. Therefore, there is the possibility of gifts made before Congressional action being subject to the lower rate. This suggests that someone planning to make a gift that will be taxed should be encouraged to make the gift now instead of waiting.
This tax tip contributed by:
Bob Turner, CPA
Mueller & Co., LLP
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