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Latest GRB News Federal Estate Tax Alert
The unthinkable has happened.
In 2001, Congress passed the Economic Growth and Tax Relief Reconciliation Act of 2001 (the “Act”) which immediately raised the exemption from Federal Estate Tax (“FET”) from $675,000 to $1,000,000 and then gradually increased the exemption to $3,500,000 in 2008 and 2009. The Act also provided for the repeal of the FET in 2010, which was the ultimate goal of the tax cutters in Congress. Unfortunately, because the majority in the Senate fell 2 votes short of the 60 votes needed to make the tax cuts permanent, the Act contained a “sunset” provision that makes the Act null and void after 10 years. So, like Cinderella’s coach turning back into a pumpkin at midnight, at the end of 2010 the Act goes away and we return to the FET law as it was in effect in 2001. This means that the FET returns in 2011 with just a $1,000,000 exemption and tax rates on any excess amounts ranging from 37% up to 55%.
Even though the FET has been repealed for 2010, the Federal Gift Tax remains in effect with a $13,000 annual exclusion and a $1,000,000 lifetime exemption.
Because the big spenders in Congress did not want the FET to be repealed in 2010 (with the loss of billions of tax dollars they could spend), and the tax cutters did not want the FET to return in 2011 with an exemption of only $1,000,000, virtually everyone confidently predicted that Congress would “fix” this inconsistent policy and enact a compromise that would continue the FET in 2010 and later years with an exemption in the range of $3,000,000 to $5,000,000. Indeed, in early December, 2009, the House of Representatives passed a bill that would make permanent the 2009 exemption of $3,500,000 and rate of 45%. However, the Senate was tied up with health care reform legislation and never acted on any of the several bills that were introduced to address the FET problem.
Thus, here we are in early 2010 with no FET and facing the prospect of the FET returning in 2011 with only a $1,000,000 exemption. What no one thought would ever occur has happened. Now some pundits are predicting that Congress will act this year to restore the FET with an exemption of $3,500,000 retroactive to January 1, 2010. Others believe that Congress will not act to increase taxes by restoring the FET in an election year. Of course, trying to predict what Congress will do is an uncertain business at best.
What does all of this mean to you?
If you are married and your estate plan provides for the creation of a Credit Shelter Trust funded with the maximum amount that can pass free of FET at your death, and that the rest of your assets will pass either outright to, or in a Marital Trust for, your spouse, it may be that all of your assets would go into the Credit Shelter trust and nothing would pass outright to or into a Marital Trust for your spouse. This may be of no real consequence if your spouse is the beneficiary of your Credit Shelter Trust. But, if someone other than your spouse is the beneficiary of the Credit Shelter Trust, or if you provided different rights for your spouse in the Credit Shelter Trust than in the Marital Trust, this could make a major difference.
If you are unmarried and your estate plan provides that the amount that can pass free of FET would pass (outright or in trust) to one or more individuals and the rest of your assets would pass to charity or to charitable trusts, the repeal of the FET in 2010 could make a tremendous difference in who inherits your assets.
What should you do?
Stay tuned! If Congress does enact a change to the FET, we will include a description in a future newsletter. In the meantime, if you have any questions about how the FET changes may impact your estate plan, please do not hesitate to call us.
For more information, contact Bob Winters.
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