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No Estate Tax in 2010 What you need to know

– January 20, 2010

In 2001 President Bush signed The Economic Growth and Tax Relief Reconciliation Act into law. The bill contained estate and gift tax reform provisions which eliminated the federal estate tax for one year beginning January 1, 2010. Since that time, the general consensus among tax practitioners has always been that Congress would address this matter and pass some legislation to keep the estate tax in place for 2010. However, as of today, there is no federal estate tax or foreseeable timeframe for change to current
legislation.

Where we are today

• The estate tax is repealed for 2010, but only for 2010. No estate tax will be owed for an Alabama resident who dies in 2010, regardless of the size of his or her estate.*
• The generation skipping transfer (GST) tax is repealed for 2010, but only for 2010.
• The lifetime federal gift tax exemption remains $1 million, but the gift tax rate drops from 45% to 35%.
• The stepped-up basis rule for assets held at death is repealed and is replaced with a modified carryover basis rule.
• Executors of estates will be required to report certain details relating to transfers at death of noncash assets in excess of $1.3 million and appreciated property received by the decedent within three years of death for which a gift tax return was required to be filed.

*Some states, including Tennessee, have separate state estate or inheritance tax that is not affected by the federal repeal.

What this means to you

One of the most alarming concerns with the existing legislation is that some estate planning documents may now result in unintended consequences for the beneficiaries (especially surviving spouses). The elimination of the estate tax for 2010 makes it imperative that many estate plans be reviewed and possibly changed.

For instance, many estate plans call for an amount equal to the federal estate tax exemption to pass to a Family Trust (which may be for children only or spouse and children), and the remainder of the estate to pass to the surviving spouse. If an individual dies during 2010, when the federal estate tax exemption is 100%, then the entire estate will pass to the Family Trust and the surviving spouse may be left with little or nothing. It is important to make certain that the will or trust language ensures assets are available for the surviving spouse, particularly in situations involving a second marriage with children from a prior marriage.

As the prior example demonstrates, it is important that every person's estate plan be periodically reviewed to ensure that the provisions accomplish family goals and also take into account current and ever changing tax laws.

What we can expect for 2011

The looming question is: will Congress be able to address the massive confusion that is taking place as individuals try to understand and plan for a year of no estate and GST tax? Complicating the matter, if Congress were to make new legislation retroactive to January 1, 2010, numerous lawsuits over the constitutionality of such a move may occur. Such proceedings could become tied up in the courts, possibly culminating in a Supreme Court decision.

If no action is taken, effective January 1, 2011, the federal estate, gift and generation skipping transfer tax systems will be reinstated in the same form they existed in 2001. This means that:

• The federal estate tax exemption will be reunified with the lifetime gift exemption at $1 million.
• The top estate and gift tax rates will be 55%.
• The generation skipping transfer tax will come back into play with its $1 million exemption amount and its prior top rate of 55%.
• The stepped-up basis rule will return for inherited assets.

Where to go from here

Warren Averett is actively addressing the estate tax concerns of its clients. Everyone's financial position and estate planning goals are unique. Our Firm can assist you in reviewing your current estate plan and assist you in working through these uncertain times. We encourage you to contact your Warren Averett advisor, or any member of the Family & Estate Planning Team, to determine if your estate plan needs to be reviewed.

Beverly S. Virciglio, CPA
205.769.3261
beverly.virciglio@wakm.com

Debra J. Linton, CPA
205.769.3245
debra.linton@wakm.com

James R. Lazenby, CPA
205.769.3215
jim.lazenby@wakm.com

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication is not intended or written to be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii), marketing or recommending to another party any transaction or matter addressed herein.