Federal Estate Tax In 2010 by spectacular


									                                  Federal Estate Tax In 2010
                                                                                                          January 2010
Phoebe Papageorgiou
                      Despite eight years notice that the federal estate tax would be repealed for one year
(202) 663-5053
                      pursuant to the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA),
                      Congress was unable to enact legislation to extend the tax into 2010. Under the EGTRRA
                      provisions in effect, beginning on January 1, 2010, the estate and generation-skipping
                      transfer taxes were repealed and carryover basis applied to inherited assets.

                      The House of Representatives did pass an estate tax bill (H.R. 4154) on December 3,
                      2009, that would have made permanent the 2009 estate tax maximum rate of 45 percent
                      and $3.5 million applicable exclusion amount. However, the Senate, busy with health care
                      legislation, was unable to consider estate tax legislation before the end of the year.

                      A number of Democrats in Congress have vowed to reinstate the estate tax possibly
                      making it retroactive to the beginning of the year. Many Republicans, on the other hand,
                      have indicated an equally strong opposition to the tax and have raised concerns about the
                      constitutionality of its retroactive application. Generally, there is bipartisan support of an
                      estate tax rate and exclusion amount that is at least as generous as that in place in 2009.
                      However, there is quite a bit of disagreement over whether to enact a lower rate and higher
                      exclusion amount. Other issues also present possible disagreement, such as indexing for
                      inflation, portability of unused exclusion amount to a surviving spouse, and reunification of
                      the estate and gift tax regimes.

                      Congress may also consider increasing the current basis adjustment amount so that
                      smaller estates are no worse off than in 2009. Under another possibility, Congress may
                      allow estates to elect which regime they would like to use: the current repeal with a
                      modified carryover basis rule or the 2009 estate tax laws.

                      If Congress does not pass legislation by December 31, 2010, starting January 1, 2011, the
                      estate and GST tax provisions will revert back to the law in existence before the enactment
                      of EGTRRA with an applicable exclusion amount of $1 million and a maximum tax rate of
                      55 percent.

                      CURRENT LAW

                      Temporary Repeal of Federal Estate and GST Tax
                      Under EGTRRA, the estate and generation skipping transfer taxes are repealed for
                      decedents dying and generation skipping transfers made during 2010. The gift tax rate,
                      which is not repealed, remains at 35 percent with a $1 million exemption amount. In
                      addition, certain transfers in trust are treated as transfers of property by gift, unless the trust
                      is treated as a grantor trust.

                      Carryover Basis
                      In 2010, the rules allowing stepped-up basis in property acquired from a decedent are
                      repealed. In its place, a modified carryover basis regime has taken effect, in which a
                      decedent’s beneficiaries inherit the assets with a basis equal to the lesser of the decedent’s
                      adjusted basis or the fair market value of the property on the date of the decedent’s death.
                      In essence, property inherited from a decedent is treated as if it had been acquired by gift
                      and the character of gain on the sale of property is carried over to the heir.

                      Generally, an executor may increase the basis in assets owned by the decedent at death
                      by $1.3 million ($60,000 for a non-US resident decedent), but may not increase the basis in
an asset above its fair market value at the decedent’s death. The $1.3 million may be increased by the
amount of unused capital losses, net operating losses, and certain “built-in” losses of the decedent. In
addition, the basis of property transferred to a surviving spouse may be increased by an additional $3
million. After 2010, the $60,000, $1.3 million, and $3 million amounts are adjusted annually for inflation.

Gift Tax
Donors of lifetime gifts are provided an annual exclusion of $13,000 (for 2010) on transfers of present
interests in property to any one donee during the taxable year. If the non-donor spouse consents to split
the gift with the donor spouse, then the annual exclusion is $26,000 for 2010. The dollar amounts are
indexed for inflation.


The unpredictable and changing legal environment may raise compliance issues for corporate executors
and fiduciaries. For example, because Congress may retroactively apply step-up in basis to the
beginning of the year, bank executors may wish to record both the stepped-up basis and carryover basis
of estate assets. Other issues and questions to consider:

        Funding of trusts
           o Will the fiduciary need to seek court approval for a trust’s funding (e.g., a credit shelter or
                 a marital trust) when the governing document does not address what should be done if
                 the federal estate tax is no longer applicable?
           o How and when will trust fundings be accomplished for 2010 estates?
        Tax Filings
           o What should the fiduciary file with the IRS for a 2010 estate?
           o How does one prepare a GST allocation if Form 706 is not filed and the automatic
                 allocation rules are repealed?
           o How does one treat taxable terminations and taxable distributions from an existing trust?
                 What, if any, filings are required with respect to what would have been GST tax events?
        Managing Carryover Basis
           o How should the fiduciary allocate the $1.3 million and $3 million step-up for federal
                 carryover basis if the will or governing trust agreement does not otherwise specify?
           o What data does your bank collect? How is it stored? Who collects the data?
           o What if a tax law passes and retroactively changes the basis method?
                      o How will your bank fund trusts?
                      o How will your bank make distributions?
                      o Are any new provisions necessary in a refunding agreement?
        Other issues
           o What is the fiduciary’s general policy with regard to requests for expedited filings by
                 outside parties?
           o What amount of estate assets should the fiduciary distribute/keep in reserve for 2010
           o How do distribution agreements need to be modified so that clients clearly understand
                 that funds may need to be recouped later to pay any retroactive taxes that might be due?
           o Will the IRS follow the path of the funds to get their money? What is the fiduciary’s
                 responsibility as a corporate trustee or executor to retain or collect the funds?

This document is provided with the understanding that the American Bankers Association is not engaged
in rendering legal, accounting, or other professional services. If legal advice or other expert assistance is
required, the services of a competent professional should be sought.

The American Bankers Association brings together banks of all sizes and charters into one association. ABA
works to enhance the competitiveness of the nation's banking industry and strengthen America’s economy
and communities. Its members – the majority of which are banks with less than $125 million in assets –
represent over 95 percent of the industry’s $13.3 trillion in assets and employ over 2 million men and women.


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