Federal Estate Tax Repeal

Due to Congressional inaction in 2009, the federal estate tax has been repealed for individuals dying during 2010. Even though federal law provides that there will be no estate tax this year, some states, including Minnesota, will retain an independent estate tax system. It is uncertain how the provisions of many estate planning documents will be interpreted if there is no federal estate tax. This is because provisions of several common documents may be phrased in terms of tax concepts (such as the estate tax exemption amount 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 will also cause tax questions to arise.

Another change that took effect this year relates to the income tax basis of inherited assets. Income tax basis is the value from which gain or loss is measured on assets sold after inheritance. Under prior law, the income tax basis of an asset was generally changed to its current value when its owner died. This year this automatic change in basis will not occur. Rather, the deceased owner's income tax basis in assets will "carryover" to the persons who inherit the assets. This will cause income tax to be due on the sale of some inherited assets. It may be appropriate for estate planning documents to be revised in order to take into account the possibility of carry over basis. You should also retain complete financial records.

Congress may or may not reinstate the federal estate tax this year and it mayor may not try to make it retroactive. If it does nothing, the 2001 estate tax law comes back in place with much lower exemptions and higher rates than recent years.

All of this makes for a difficult and confusing planning environment. Nevertheless, planning opportunities may exist. Everyone should review the effect of this significant law change on their existing estate plan with their estate planning attorney.

-- This article was originally published on Jan. 27, 2010, in volume 7, issue 2 of the Stevens Advisor, a publication produced by Stevens, Foster Financial Services, Inc. and Stevens, Foster Tax Services, Inc.  Larkin Hoffman is an estate planning partner of Stevens Foster.