On January 1, 2010, and for the first time in almost 100 years, the United States Tax Code does NOT have a tax on the transfer of wealth at the death of an individual. However, there remains a gift tax on lifetime transfers in 2010 at a maximum rate of 35% (10% lower than in 2009).

How Did This Happen?

The Economic Growth and Tax Relief Reconciliation Act of 2001 (“the Act”) was signed into law by President Bush on June 7, 2001. The Act made many changes to the estate, gift and GST transfer tax system, gradually lowering tax rates and increasing exemption amounts.

The most significant portion of the Act was the elimination of the estate and GST taxes for 2010 and a “sunset provision” which provides that the changes in the tax law created by the Act will not apply to estates of persons dying after December 31, 2010. This sunset provision reverts the transfer tax laws back to what existed in 2001.

Now we can all point fingers at how and why this occurred but it in fact occurred and the question looming on the horizon is –– what will Congress do next and more importantly, what should you do NOW?

Three possibilities exist for 2010:

• Congress could re-enact a transfer tax law and make it retroactive to deaths occurring on and after January 1, 2010;
• Congress could re-enact a transfer tax law and make it effective as of date of enactment; or
• Congress could do nothing in 2010.

Until Congress Acts What Should You Do?

Review your estate planning documents to determine if the disposition language still meets the goals and objectives you originally established.

Disposition language that establishes bequests or trusts for children, grandchildren and/or a surviving spouse as well as charitable trusts should be reviewed for effectiveness. Specifically, estate planning documents containing references to “tax terms” (credit shelter amount) must be reviewed to avoid possible adverse interpretation.

For example, an individual’s estate planning documents provide for assets to pass to children based on the maximum amount (the credit shelter amount) allowable by law without incurring estate tax with remainder to surviving spouse. If the individual dies in 2010, the entire estate could pass to the children and zero to the surviving spouse, which may not have been individual’s original intent.

In addition carefully consideration must be given to gifts made in 2010 into certain trusts and transfers that normally under 2009 law required allocation of GST exemption.

What Happens After 2010?

After this year, the “sunset” in the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”) occurs and the estate tax returns to the pre-2002 law. The 2001 law provides for the following:

• $1 million estate tax exemption (compared to $3.5 in 2009) to be used for transfers during an individual’s lifetime or at death.
• GST exemption, inflation adjusted, drops to $1 million (projected to be $1,340,000 for 2011).
• Top estate, gift and GST tax rate increases to 55% or 60% for estate and gifts transfers between $10 million and $17,184,000.
• The estate and gift tax system is again unified. Since 2002, an individual’s transfer tax exemption was different for lifetime gift and date of death transfers.

There are significant implications to the repeal of the estate and GST tax system. We will continue to review status of repeal and update you on any changes that are forthcoming.

Please contact your CB&H representative or Michael Kirkman, Firm Director of Estates and Trusts if you would like to discuss your specific situation and the impact of the repeal.

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2. Wealth Transfer and Other Estate Planning Opportunities in Down Market
3. 2009 May Be the Year to Make Gifts of Closely Held Business Interests