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You have undoubtedly heard about the Congressional failure to fix federal estate and gift tax law.  We want to alert you to the some of the problems and point out some of the opportunities this presents.  While no one can know what Congress will do, we think it likely that income and estate taxes will rise because of Congressional inaction letting changes enacted ten years ago become effective in 2011.  However, it is possible that Congress may enact changes affecting the estates of persons dying or gifts made this year, and such changes might have retroactive effect.  The following discussion addresses the law as it currently exists, and assumes no changes will be made.

First—the Problems.
1.  The estates of those dying in 2011 or later with even modest estates (over $1,000,000) will be hit with estate tax.  The law in 2009 provided for an exclusion that effectively exempted estates of $3,500,000 or less from estate tax.  Much planning has been done under the assumption that the $3,500,000 exemption would apply.  The lower exemption level means that strategies which may not have previously seemed necessary might now be beneficial, and some of these involve taking action this year.

2.  Many existing trusts provide for a Family Trust and a Marital Trust to be funded according to a formula which assumes there is a federal estate tax.  In 2010, because there is no federal estate tax, depending on the formula in the trust, trust assets could pass entirely to the Family Trust or entirely to the Marital Trust.  This could inadvertently disinherit a surviving spouse or other beneficiary.  Utah has enacted legislation to “fix” this problem, but many states have not.  However, even with a state law fix, your assets may not be distributed as you desire.

3.  The heirs of those dying in 2010 will have to use a carryover basis for assets passed at death instead of the step-up in basis allowed under pre-2010 law.  While there is still a $1,300,000 general step-up and a $3,000,000 marital step-up, proper structure is needed to get optimal basis step-up.  Basis affects the amount of income tax heirs will have to pay when inherited assets are sold.  The heirs of those dying in 2010 may face more income tax than necessary when estate assets are sold if action is not taken to maximize basis step-up.

Second—the Opportunities.
1.  The 2010 rate on lifetime taxable gifts is 35% which will increase to 55% in 2011.

2.  In 2010, there is no generation-skipping transfer tax.

2010 could be an advantageous year for gifting, particularly to grandchildren.  Gifting could lower future estate tax and increase wealth transfer.  However, special care must be taken to avoid unfavorable effects occurring in 2011 or later years arising from gifts made in 2010.  We had hoped Congress would act; however, prospects seem dim.  We urge you to seek our advice and counsel in reviewing and possibly adjusting your estate planning to avoid the problems and to take advantage of opportunities.  We look forward to hearing from you.

IRS CIRCULAR 230 DISCLOSURE:  To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication, unless expressly stated otherwise, was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any  tax-related matter(s) addressed herein.