When we chose the subject of this newsletter back in September, we believed we would be reporting on what Congress had done with respect to the estate tax. However, Congress hasn’t done anything. Therefore, the estate tax, along with the generation-skipping tax, has expired as of January 1, 2010, but will reappear on January 1, 2011 at much higher rates and with lower exemptions, unless something is done this year. The gift tax is still in place, but the rate dropped to 35% in 2010 from 45% in 2009. As of right now, estates will not receive the fair market value step-up on basis that they received before, although there is an allowance for a $1.3 million increase in the basis of appreciated assets.

If this wasn’t confusing enough, leading Democrats were vowing to reinstate the estate and generation-skipping taxes retroactively to January 1, 2010. However, it is unknown what the tax rates and exemption levels would be, how long they would last, or if this can actually be accomplished retroactively without being unconstitutional.  

Our best guess (and it is a guess) is that the estate tax (along with the generation-skipping tax) will be retroactively reinstated at 2009 levels of exemptions of $3.5 million (which may be indexed for inflation) and a tax rate of 45%.  

Conclusion

All of this is creating estate and gift planning dilemmas. Therefore, our best advice is to seek out experienced estate planning professionals and adhere to their advice. All of the changes could create opportunities that could be quickly extinguished, so it could pay well to be ready to take advantage of these opportunities as they come along.  

• Murphy v. U.S. (filed 10/2/09)
  
  
• Petter v. Commissioner (filed 12/7/09)
  
  
• Estate of Morgens v. Commissioner (filed 12/21/09)
  
  

• "Closing the Tax Gap: The Estate Tax Non-Gap: Why Repeal a 'Voluntary' Tax?", by Paul L. Caron and James R. Repetti, 20 Stan. L. & Pol'y Rev 153, 2009
  
  
• "Qualitative Judgments and Consistency in Business Valuation", by Michael Sach Elmaleh, Journal of Business Valuation and Economic Loss Analysis, Volume 4 Issue 1, 2009