“To the dismay of most observers, Congress has ended its 2009 session without resolving the frustrating uncertainty surrounding federal estate tax rules. Efforts in the Senate to extend the 2009 estate tax rules, which included a $3.5 million exemption and a 45 percent tax rate, stalled just before the Christmas holiday.
As a result, for the first time since the modern version of the federal estate was enacted in 1916, 2010 began with no federal estate tax.
But a celebration of the repeal of the federal estate tax may be premature for several reasons.
The repeal of the federal estate tax under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) is only temporary. EGTRRA is scheduled to sunset at the end of 2010, and the levy on estates would come roaring back in 2011 at the pre-EGTRRA levels of a $1 million exemption and a top tax rate of 60 percent.
The chances that Congress will make the repeal of the estate tax permanent beyond 2010 are somewhere between slim and none.
There is a sharp trade-off for abolishing the federal estate tax under EGTRRA. In exchange for repealing the federal estate tax, which impacted approximately 0.3 percent of all estates when the exemption was $3.5 million in 2009, EGTTRA limits the basis adjustment of property acquired from a decedent to $1.3 million. Heirs selling inherited property above the $1.3 million limitation at a gain will incur capital gain taxes.
Finally, Congress has pledged to restore the estate tax during 2010, retroactively back to the beginning of the year. Retroactive legislation of this nature will almost surely be challenged by the estate of someone dying before new laws are enacted, but Congress has retroactively changed tax laws before, and the U.S. Supreme Court has upheld such action as being constitutional.
This may be a good time to meet with an attorney or other advisor to review existing estate planning documents. A good set of estate planning documents is designed to be flexible and effective no matter what level the federal estate tax exemption is pegged at today, and in the future.”