No Estate Tax in 2010 - What Opportunities Might there be?

 My two prior posts have been about the  federal tax impact for single individuals who die in 2010, and the federal tax impact for married individuals.  In summary the results for singles were not good, and for marrieds were worse – the "death" of the estate tax creates a capital gains "trap" for survivors.  While all this will be moot if Congress does as they have promised and create an estate tax retroactive to January 1, 2010, they haven’t acted yet, and as of January 1, this is the law.

What planning can be done in this environment?

Can you just say “whoo-hoo”; I’ll give everything to my children.  Hold on there – the federal estate tax is repealed in 2010, not the federal gift tax.  Each person still has a lifetime exemption of $1,000,000 – if you make gifts in excess of that in 2010, you will be subject to the federal gift tax at a rate of 35%.

However, the generation skipping tax (“GST tax”) is repealed in 2010.  The GST Tax essentially says that you can only leave up to $3.5 million to grandchildren without paying a separate tax of 55%.  The theory behind the GST Tax is that the government should share in the wealth at each generation.  If grandma leaves everything to granddaughter, the IRS might need to wait 75 years until tax can be collected again.  If assets go the children, the IRS might only have to wait 30 years to tax again.  So, in 2009 you could leave up to $3.5 million to grandchildren without GST tax. In 2010, you can leave everything to grandchildren without an additional tax.  For wealthy families, this could mean a huge amount passing to lineal descendants with the only tax cost(s) being capital gains (click here for an explanation of the 2010 capital gains tax trap for estates).

The estate plan you had in 2009 and will need again in 2011 won’t really make sense in 2010 unless they make the estate tax retroactive.  Do you need to go out and totally revise your plan? Not necessarily.  If you have a terminal situation however, it definitely bears looking at your current plan to make sure it addresses how to plan to minimize capital gains taxes instead of estate taxes.

Gifts to grandchildren may be a winning strategy in early 2010.  Also, for anyone who is terminally ill, a change of an estate plan to leave assets to grandchildren may be a winner as well (although if the estate plan isn’t changed, disclaimers may be able to be employed by the children to a similar effect).  And it will bear looking at the estate plan of anyone who is terminally ill.


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Hayes Legal Videos - January 7, 2010 2:29 PM

This is very important information for 2010. I'll be interested to see if congress does go ahead and make the tax retroactive. But, like you said, in the mean time it is critical to have a proper plan in place.

I wish I had more than $3.5 million so that I could worry about that particular issue! haha.

John - January 12, 2010 5:36 AM

I guess the question I have is if the money is left to the grandchildren, can the children access those funds or does it have to be placed in a special bank account?

Deirdre R. Wheatley-Liss, Esq. - January 12, 2010 10:04 AM

Where money goes to grandchildren it must be just for their benefit, either outright or in a trust where the grandchild is the sole beneficiary. However, in the broaden scheme, where a grandchild has assets of their own, those assets can be used for the grandchild's needs, which gives the parents and indirect possible benefit.

Davis - January 21, 2010 7:40 PM

My father passed away the first week of 2010. (My mother had passed 3 years earlier, and a proper $2 million marital trust was created at that time.) Since my father died in 2010, does his estate even have to file an estate tax return?

Deirdre R. Wheatley-Liss, Esq. - January 22, 2010 9:01 AM

At the present time the law is that the estate will need to prepare and file a carry over basis return on or before 9 months from date of death. No such form has been created and we don’t know what the filing thresholds will be. When created, that form will require the basis of each asset be listed as well as the value at date of death. Each person has a $1.3 million exemption, but its allocations and tracking will be the issue. At this point you may want to consider creating a document that tracks each asset, its basis (to the extent you have) and date of death values. Also, depending on the state where your father resided, you need to see if you have state level estate tax issues to address.

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