Federal Estate, GST And Gift Tax Law: Current Status And Possible Retroactive Legislation

Despite legislation proposed by Congress in 2009, which we reported on in our prior Alerts, Congress has nevertheless been unable to prevent the repeal of the federal estate and generation-skipping transfer (GST) taxes. Consequently, the landscape for the federal estate and GST taxes appears markedly different than it was in 2009, and different from how it is likely to be in 2011. Even though Congress did not reach agreement on the federal estate, GST, and gift taxes in 2009, members of Congress have indicated that congressional consideration of such taxes will be a priority in 2010—and that the legislation will have an effective date retroactive to January 1, 2010. Adding to the uncertainty is the extent to which retroactive legislation, if passed by Congress, would be subject to a constitutional challenge.

Present Status Of Estate, GST And Gift Tax Law

Although it is impossible to predict the nature and extent of Congress' actions in 2010, the summary below details federal estate, GST and gift tax law at present and how the law would exist in 2011 should Congress not enact new legislation.

For a decedent dying in 2010, the estate has unlimited federal estate and GST tax exemptions. Thus, no estate of a decedent dying in 2010 would pay any federal estate tax, and no person making a generation-skipping transfer in 2010 would pay any federal GST tax. In 2011, however, if Congress does not act, the federal estate and GST tax exemptions will return to $1 million, the maximum federal estate tax rate will return to 55 percent (subject to a surtax for certain estates), and the maximum GST tax rate will return to 55 percent. For an estate of a decedent who dies in 2010, the assets of the estate no longer would receive a full step-up in basis to the date-of-death value of the assets. Instead, these assets would be subject to the "modified carryover basis" rules, under which the basis of the estate's assets would be equal to the lesser of the decedent's adjusted basis in the assets or the fair market value of the assets on the date the decedent died. Although the executor of an estate may, generally, allocate up to $1.3 million to increase the basis of an estate's assets and $3 million to increase the basis of estate assets passing to a surviving spouse, these allocation amounts have limited ceilings. Thus, it is possible that the basis of an estate's assets could be stepped down. In 2011, the basis step-up rules applicable prior to 2010 will...