Due to inaction by Congress, on January 1, 2010, the federal estate, gift, and generation-skipping transfer tax laws changed dramatically. Under the Economic Growth and Tax Relief Reconciliation Act of 2001, the estate tax and the generation-skipping tax expired at the end of 2009. Congress might enact legislation in 2010 reinstating the taxes, which might be retroactive to January 1. The taxes could be reinstated either as they existed on December 31 or in some other form. This situation makes estate and gift planning and estate and trust administration unpredictable and extremely challenging for lawyers and their clients.
 
Since there is currently no federal estate or generation-skipping tax, existing language in wills and trusts referring to estate and gift tax exemptions might need clarification. For example, depending on the interpretation of a formula in a will or trust, children or grandchildren could receive all of a trust or estate and a spouse could receive nothing.
 
It is possible that there will be gifting opportunities in 2010, especially with respect to generation skipping. There is uncertainty in this area as well, but clients might find these possibilities attractive in 2010. Gift tax rates decreased from 45% in 2009 to 35% in 2010, though retroactive law might increase the gift tax rate later this year.
 
To complicate matters further, in 2011, the law as it existed before the 2001 Act was passed will return. In 2011, the estate tax exemption will be $1 million per taxpayer. The generation-skipping exemption will be somewhat higher and indexed to the cost of living.

In 2010, treatment of capital gains on property in an estate will be less favorable. This new “carryover basis” rule can complicate estate administration in 2010.

For some clients, refraining from reviewing or updating wills, trusts, beneficiary designations, and other planning will cause no harm. For many others, however, updating planning documents will be imperative, especially in case death or disability occurs before Congress enacts a new legal regime.
 
Taft’s Private Client group lawyers are available to help clients analyze opportunities for tax savings and address issues with respect to estate, gift, and generation-skipping planning. We encourage you to contact us with any questions.