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Federal Estate Tax Changes for 2010

Added by John McGown in Articles & Publications, News, Tax Law on May 1, 2010

A portion of federal legislation dealing with the estate tax laws that was enacted in 2001 became effective on January 1, 2010. As a result of this change, there will be no federal estate tax in 2010 (although some states will retain independent estate tax systems). Idaho does not have an estate tax. However, there is a strong push in Congress to reverse this change retroactive to January 1, 2010. Indications are that if Congress does reverse the change, it will continue the estate tax law in effect on December 31, 2009, for the foreseeable future.

Document Interpretation/New Idaho Law

Due to the repeal of the estate tax, it may be uncertain how the provisions of estate planning documents will be interpreted if there is no estate tax. This is because several provisions of some Wills and Trusts are phrased in terms of tax concepts, such as the estate tax exemption portion and marital deduction. Because those tax concepts are not in the law this year, there may be some question as to what the documents mean and how they dispose of property. That in turn may cause tax questions to arise. You should review your documents to see if these tax concepts are used. If so, Idaho House Bill No. 472, discussed directly below, may be very relevant to your situation.

Idaho House Bill No. 472, which Governor Otter signed on March 25, 2010, significantly reduced this risk of uncertainty. This legislation provides that estate planning documents be interpreted based on the estate tax law on December 31, 2009. As such, House Bill No. 472 reduces uncertainty in Wills and Trusts governed by Idaho law. See House Bill No. 472 and the related Statement of Purpose. If you would like to discuss how this might apply to your situation, please contact us.

Income Tax Basis in Inherited Assets for Persons Dying in 2010

Another tax law change takes effect this year (although it also may be repealed retroactively). This tax law change relates to the income tax basis of inherited assets. Income tax basis is the value from which gain or loss on assets sold is measured. Under the law up until this year, the income tax basis of an asset is changed to its value when its owner dies, as a general rule. But this year, this automatic change in basis will not occur. Rather, the deceased owner’s income tax basis may “carry over” without adjustment to the persons who inherit the assets, although in most cases at least $1.3 million is available to increase the carry over basis of assets to their fair market value. It may be appropriate for estate planning documents to be reviewed in order to take into account the possibility of carry over basis.

Federal Estate Tax Changes for 2011

I am optimistic that Congress will act this year to address the significant uncertainty created by the 2001 legislation which has the federal estate tax exemption going from $3.5 million in 2009, to unlimited in 2010, to $1 million in 2011. But if Congress does not act, then on January 1, 2011, there are a number of automatic changes to the federal tax code. These include the federal estate tax exemption dropping to $1 million per decedent and the estate tax rate increasing from 45% in 2009 to a 55% rate above $3 million and 60% above $10 million in 2011.

Conclusion

In sum, these changes might have a major impact for individuals dying in 2010, although any such impact is minimized in many cases by the enactment of Idaho House Bill No. 472. Retroactive Congressional legislative action might further negate any impact. The important point is to let you know of these changes. If Congress fails to act, the lower federal estate tax exemption and higher estate tax rates will have a major impact on many individuals dying in 2011 or later.

If you are interested in learning more, or are concerned about the plans for your estate, please contact us at 208.344.6000 or a member of our Estate Planning group.