Estate Planning for 2010

The jury is out. Is it a good year to die – or not? At first blush we would say, “yes,” although we are far from advocating anyone test this notion.

As financial planners we are still reeling over Congress’ lack of action on estate taxes prior to the beginning of 2010. It is not as though someone failed to tell our legislators that letting this issue slide would cause massive confusion. 2010 has long been known as the great divide between what had been an increasingly liberal environment for estate taxes (from 2002 through the end of 2009) and a return to far stricter and less generous estate tax rules in 2011. 2010 was carved out as a year with its own special provisions centering on the complete repeal of estate taxes altogether. No one thought it had a remote chance of actually happening.

Background
In 2001 President Bush signed a law that would gradually increase the amount of money decedents could leave to their heirs without paying federal estate taxes. (The changes to Rhode Island and Connecticut laws will be left for another day). In 2009, if you passed away, each person could leave up to $3.5 million dollars (marital gifts were unlimited) without paying the federal government a dime. In addition, the marginal estate tax rate stood at 45%, down from 55%-60% when the bill was first enacted.

But because of long term budget constraints back in 2001, Congress determined that the generous provisions had to sunset on the stroke of midnight December 31, 2010. While Cinderella’s children would not suddenly become poor, the $3.5 million estate and Generation Skipping Tax exemptions would magically change back to $1 million with a tax rate of up to 60%, should Congress fail to act to preserve the 2009 – or other – estate tax rate. That leaves an orphaned 2010 year – the odd child that everyone ignored, at least until now.

While you probably will not die in 2010, you still need to consider planning for that possibility. This letter is intended to advise you of the rule changes and to encourage you to review your estate plan with your attorney.

2010:
Changes:
•    For now there is no federal estate tax or generation skipping tax for individuals who pass away in 2010.
•   If you gift in excess of $1,000,000 (this limit has not changed) you pay a one year rate of 35%.
•   There is no step-up in basis. That means assets are subject to capital gains tax on the difference between their original cost and their value on the date of death. This is called adjusted carry-over basis.
•   The executor of your estate can allocate up to $1,300,000 in basis to any assets in your estate. For instance, if you have an investment property worth $1,000,000 and your carry-over basis is $500,000 you can add $500,000 – from the $1,300,000 exemption - to the basis of that property in order for the estate to avoid capital gains tax.
•   Executors can also apply up to $3,000,000 in basis to their spouses or to certain trusts that have been set up for the benefit of the surviving spouse.
•   Congress has promised to pass new estate tax rules this year. The easiest route will be to extend 2009 provisions one or two more years. Congress has also expressed the desire to apply the new rules retroactively from January 1, 2010, thereby eliminating the no-estate-tax benefit currently enjoyed. But any retroactive clause is bound to be challenged in court, and any conclusion could take years, complicating estate planning for those who pass away in 2010.

What hasn’t changed: lifetime giving
Don’t change your gifting plans this year simply because the estate tax rules are in flux.
•   You can still gift up to $13,000 a year to as many individuals as you like. Spouses can gift $13,000 as well, so that a married couple can pass on $26,000 to each of their children (or other individuals) without reporting gift taxes.
•   529 plans can accept up to five years worth of gifts at one time ($65,000).
•   Lifetime gifts of $1,000,000 (beyond the annual $13,000 exclusion) still require reporting but no gift tax.
•   Charitable giving is alive and well and can help to reduce the size of larger estates.

Implications:
We are in uncharted territory in terms of estate planning. Precedence is lacking, and uncertainty is high. Having a reputable and knowledgeable estate planning attorney is extremely important for anyone needing to establish or update their estate planning goals and documents.

StrategicPoint Working with You
If you need a recommendation for an estate planning attorney, we can help you find a good professional match or if you have any general questions about your estate planning, please give us a call.

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