No US Estate Tax for 2010?

Article by Richard A. Campbell , James A. Casey , Barbara R. Grayson , Daniel W. Luther , Howard M. McCue, III , Donna E. Morgan and Donald C. Morris

Originally published January 4, 2010

Keywords: US Estate Tax, 2010, extension, 2001 Tax Act, federal estate tax exemption, provisions

Summary

The US Congress did not enact an extension of the estate tax before December 31, 2009. Accordingly, there is now a one-year repeal of the estate tax for 2010, subject to future Congressional action that might reinstate the tax at any time.

Full Update

The 2001 Tax Act increased the federal estate tax exemption and lowered rates between 2002 and 2009. In 2009, there was a $3.5 million exemption and a 45 percent top rate for the estate tax, applicable to estates of persons dying in 2009, and for the generation-skipping transfer tax (GST). The same 2001 Tax Act provides for a one-year repeal (2010) of the estate tax and the GST — but not the gift tax — and it provides that beginning January 1, 2011, the estate tax and the GST are reinstated with a $1 million exemption and a 55 percent top rate (plus a 5 percent surtax for certain large estates).

For several years, Congress has considered a number of proposals to make better sense of the estate tax. These proposals have ranged from outright repeal of the estate tax to a broad spectrum of "reform" proposals intended to make the tax permanent but with greater certainty as to the rules. In December 2009, the House of Representatives passed a proposal to make the estate tax permanent, with rates and exemptions fixed at 2009 levels, but the Senate adjourned without taking up the House bill. Some Senators of both parties favor outright repeal, some favor extension of the 2009 law, some favor an estate tax with lower rates and a higher exemption and some would prefer higher rates and a lower exemption (that could be expected to affect more families and raise more tax revenue).

There are a number of gift and estate tax provisions that have not been in the law since 2002, but which seem to be reinstated by the 2001 Tax Act, effective either January 1, 2010, or January 1, 2011, if there is no corrective legislation on these topics in the coming months. These provisions, as drafted, may have unintended consequences.

What About Carryover Basis?

A major wildcard in the 2001 Tax Act is a provision for "carryover" basis, applicable to estates of all persons dying in 2010. Under the carryover basis rules, those who take...