2010 Estate Tax Repeal

Current Status of Estate Tax Law

America is now more than halfway through a one-year repeal of the federal estate tax. The federal estate tax is essentially a tax levied on an inheritance passing to anyone other than a spouse or a charity. Under current law, there is an unlimited federal estate tax exemption in 2010, then in 2011 and forward the federal estate tax exemption is $1.0 million with a 55% tax rate. Under the current law there are also limits to "step-up" in cost basis (under prior law, upon death the new cost basis of an asset passing through an estate is the fair market value as of the date of death).

How Can I Tell if This Will Affect Me?

Many Wills and/or Revocable Trusts contain "formula" langue with reference to the federal estate tax exemption. With a temporary repeal of the federal estate tax these "formulas" may be inconsistent with your estate plan. For example, many estate planning documents leave the "amount that can pass free of federal estate tax" to their children and the balance to their spouse. Under current law this would mean the entire estate passes to the children and the surviving spouse is excluded.

Since several state estate taxes are not affected by the current repeal of the federal estate tax, these “formula” clauses could result in unexpected state estate taxes. For example, many people leave the “amount that can pass free of federal estate tax” to a Credit Shelter Trust for the benefit of the surviving spouse. Under current law, this would mean the entire estate passes into the Credit Shelter Trust and could result in a significant amount of unexpected state estate taxes.

Listed above are just some of the examples of how the current federal estate tax law could impact one’s estate.

What Should I do?

Based on the current status of the federal estate tax law, it is important to have your estate plan reviewed by an estate planning attorney to make certain that your interests are best served.