ESTATE TAX UNCERTAINTY

Is your family protected and are your intentions properly reflected in your current Will?

Depending on when you last updated your estate planning documents, your current Will and estate planning documents may no longer meet your planning objectives.

You may recall that in 2001 Congress substantially revised the estate and gift tax laws. The law, as enacted in 2001, gradually eliminated the estate tax by increasing the amount that was exempt from the tax over several years and reduced the top rate over several years. The estate tax was repealed for individuals dying after 2009. There was, however, a quirk in the new law. To comply with budgetary rules, the 2001 Tax Act contains a “sunset rule” under which the pre-2001 Act rules return after 2010, unless Congress provided otherwise at some future time. This means that although the estate tax is repealed, it is repealed only for those who die in 2010; absent Congressional action, the estate tax returns thereafter unless Congress provides otherwise.

Most tax planners expected Congress to act in 2009 to either temporarily or permanently extend the 2009 scheme ($3,500,00 Federal estate tax exemption with a top tax rate of 45%) – but, to everyone’s surprise, Congress failed to take action to modify the Federal estate tax laws put into place in 2001. As a result, there is no Federal estate tax for decedents who die in 2010; and, starting in 2011, the Federal estate tax will return with an exemption of $1,000,000 and a tax rate of up to 55% - unless Congress acts.

In addition, for 2010, (a) there is a modified carry over basis for assets that are inherited, rather than the traditional step-up in basis for inherited assets; (b) the generation skipping transfer tax is eliminated in 2010 and returns in 2011; and (c) the Federal gift tax exemption of $1,000,000 remains in place and unchanged.

To add to this uncertainty, some states (such as New Jersey and New York) still have their own state estate tax exemption and New Jersey retains its collateral inheritance tax based on the beneficiaries degree of kinship from the decedent.

We still expect Congress to act in 2010 but we are currently in unknown territory. While this gets sorted out, we suggest that you have your current testamentary documents reviewed to ensure that they have the flexibility to adapt to the changing tax laws while continuing to meet your planning intentions and objectives.

If you have any questions, please contact Jane Brody (973) 232-0600 jlbrody@marcusbrodylaw.com.