[QCWA] Members' Wealth Management

[thirsch at ameritech.net]

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Wealth Management

The Estate Tax Is Repealed..._/for Now./_
                What's Next?
As you may have heard, Congress failed to
pass legislation by the end of 2009 to extend
the federal estate tax rates and exemption
level. As a result, federal estate and
generation-skipping tax is repealed for one
year from January 1, 2010 through December
31, 2010.
So what does this mean for you?
Since the federal estate tax is repealed (for 2010 only),
individuals who die during 2010 will not be subject to
federal estate tax regardless of the size of their estate.
The repeal applies to federal estate tax only. Many states
will continue to have an estate tax. For individuals who
die after 2010, the estate tax is scheduled to return with a
$1,000,000 maximum exemption and a graduated tax with
a top rate of 55%. The exemption is the amount free from
estate tax and amounts over the exemption are subject to
federal estate tax.
For example, a taxpayer with a $5 million net taxable
estate who passes away in January 2010 will not be subject
to federal estate tax. However, if the taxpayer dies on
January 1, 2011, his estate will be liable for federal estate
tax of $2,045,000.
To offset the loss of the estate tax in 2010, the step-up
basis in assets inherited is eliminated and replaced with a
modified carryover basis. Prior to 2010, the tax basis of an
asset is "stepped up" at the individual's death to equal the
asset's fair market value at that time. This may result in a
signifi cant tax savings when you sell the asset because the
cost basis is based on the date of death value and not the
lower basis to the original owner.
In 2010, only $1.3 million of estate property will qualify for
the step-up in basis. For property passing to a surviving
spouse an additional $3 million of assets gets adjusted.
Additional property over these amounts do not get
adjusted and retain the original owner's basis or the date
of death value, whichever is lower. Your fi nancial records
should be reviewed to ensure you have accurate tax basis
information in case the step-up basis rule does not apply.
In addition to the repeal of the estate tax and generationskipping
tax, another major change is to the federal gift
tax rate. In 2010, the maximum federal gift tax rate is 35%
compared to 45% in 2009. In 2011, it will increase to 55%.
The annual exclusion amount continues to be $13,000 in
2010 with a lifetime exemption amount of $1,000,000.
Have Your Estate Plan Reviewed
With the repeal of the estate tax in 2010, your Will or
Revocable Trust should be reviewed to ensure the
distribution of your estate is in line with your intentions.
If you are married and your estate plan provides that the
maximum federal estate tax exemption amount will pass
to your children or other benefi ciaries, your plan may
disinherit your spouse if you die while the estate tax repeal
is in effect.
Some sophisticated estate plans may contain provisions
related to generation-skipping trusts or direct gifts to
grandchildren. Since the generation-skipping tax is
repealed in 2010, these transfers may not be made if the
generation-skipping tax is not in effect.
Potential Opportunities
The current 35% federal gift tax rate is relatively low. If you
believe that gift tax rates will in the end go back up to 45%
or even 55% and you want to make some meaningful gifts
in your lifetime, 2010 may be the best time to do it.
Currently transfers to a "skip" generation (i.e., grandkids)
are exempt from generation-skipping tax (GST) which
was 45% in 2009. As a result, 2010 could be a window
of opportunity to make signifi cant gifts to grandchildren
directly, or to a "dynasty trust" which can benefi t multiple
generations without estate tax consequences. While gifts
to a "dynasty trust" may be subject to gift tax at a reduced
rate of 35%, they will not be subject to estate or GST tax.
Watch Washington this year.....
Congress will be busy during the first quarter of 2010 to
enact some sort of estate and GST tax, but the question
is whether Congress will make the new law retroactive to
January 1, 2010? If retroactive provisions are approved, it
could face constitutional challenges in court.
The repeal of the estate and GST tax in 2010 and
subsequent reinstatement of both in 2011 will cause
huge problems.
Now is a good time to have your estate plan
and your overall state of affairs reviewed to
ensure these problems can be minimized.