Congress Repeals Federal Estate Tax for 2010
The Federal estate tax which was implemented in early 2001 terminated as of January 1, 2010. While the House has passed a bill that would continue the Federal estate tax as it existed in 2009 for an additional two years, the Senate has failed to address the issue. Therefore, effective January 1, 2010, the Federal estate tax and generation-skipping tax will lapse for one year. However, it is anticipated that Congress will act in early 2010 to reinstate the Federal estate tax which most likely will be retroactive to January 1st. The timing of any reinstatement of estate tax depends on a variety of issues before Congress, including the fact that 2010 is an election year. We would recommend that most estates will need to set aside sufficient funds to pay estate tax, based upon the tax in effect through 2009, until Congress decides whether or not any tax will be retroactive and any court challenges to the retroactivity are addressed.
We have been watching this matter closely for some time and in many instances have advised that Congress would likely act prior to the end of 2009 so that this uncertainty in 2010 and the repeal of Federal estate tax would be addressed. The announcement from Washington that no action would occur before the repeal took effect was a surprise to even seasoned Capitol observers. However, at present, the estate tax is repealed for 2010. Given Congress' failure to act, what weighs on many clients' minds is how to minimize their exposure in these uncertain times and how will they be impacted?
- After January 1, 2010 but before January 1, 2011 or earlier reinstatement of any tax, there will be no Federal estate tax or generation-skipping tax, but for Pennsylvania residents and those of other states, certain inheritance and state death taxes will still apply. With the elimination of the Federal estate and generation-skipping tax, there will also be the loss of a "step-up" in cost basis (that formerly has been applied to estate assets, i.e. those inheriting assets), to the extent assets exceed $1.3 million, the excess will retain the cost basis of the decedent and not be entitled to use the date of death value as their cost basis in calculating gains or losses. There are some provisions to ease the burden on capital gains that will now be imposed due to the loss of a step-up in cost basis which can be addressed on an individual basis.
- In 2011 the estate and gift tax rate is increased to 55% and the exemption amount will be reduced to $1,000,000, which is significantly less than the $3.5 million exemption through 2009.
If you have not reviewed your estate planning documents and the manner in which your assets are held or titled and the beneficiary designations relating to certain other assets in the last few years, please feel free to contact:
James Jacquette
John J. McAneney
Michael O'Hara Peale, Jr.
George M. Riter
Thomas Timoney
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