ESTATE TAX CHANGES?

Do you remember the Economic Growth and Tax Relief Reconciliation Act of 2001 (Tax Relief Act) that was signed by President George W. Bush on June 7, 2001? If you answered no, you are not alone, but the 2001 Tax Relief Act is about to dramatically impact the estate tax.

As a refresher, the estate tax is a tax imposed upon your estate when you die, provided that the value of your property exceeds the estate tax applicable exclusion amount and you are not leaving your property to your spouse. For 2009, the applicable exclusion amount is $3,500.000. This applicable exclusion amount has gradually increased since 2001.

There is also a $1,000,000 gift tax applicable exclusion amount. The gift tax applicable exclusion amount offsets taxable gifts made by a taxpayer during his or her lifetime. Generally, a taxable gift is any transfer made without consideration that is in excess of the $13,000 annual gift tax annual exclusion. Any applicable exclusion amount used against taxable gifts during an individual's lifetime will reduce the applicable exclusion amount that is available to offset the estate tax at death.

The 2001 Act is scheduled to repeal the estate tax for 2010 and implement a modified carryover basis system. However, there is a catch with the repeal. Unless Congress votes to extend the estate tax repeal, the estate tax will return in 2011. For 2011, the applicable exclusion will decrease from $3,500,000 to $1,000,000. The applicable exclusion for gifts will stay at $1,000,000.

Recently, the House of Representatives passed a bill to maintain the current estate tax rates at 45% and maintain the $3,500,000 applicable estate tax exclusion. This bill still needs to be acted upon by the Senate and signed by the President, all before the end of the year.

If the Senate does not act before the end of the year and the estate tax is eliminated, there is a catch that was put into the 2001 Act. Although the estate tax is eliminated, there is potential for the heirs receiving the property to pay income tax down the road. Under current rules, the tax basis of property acquired from a decedent equals its fair market value at the decedent's date of death. For a decedent dying after December 31, 2009, the current adjustment to basis rule for property acquired from a decedent will be eliminated and replaced by a modified carryover basis system. A modified carry over basis system is designed to ensure that any appreciation in property that occurred during a decedent's lifetime is taxed at some point. In 2010, the law will shift the event that creates taxation from a decedent’s death to a sale or other disposition of the property by the heirs after they inherit the property from the decedent. Like any good tax law, there are many exceptions and loopholes to work through.

For those of you that had the internal fortitude to get this far with this article, I know what you are thinking. All of the changes in the law are confusing and Congress will probably change the law anyway, so why should I care when I have so much else to worry about? But anyone who has had a will or trust prepared in the last 10 years with a marital trust, non-marital trust or family trust provision needs to have it reviewed and probably changed, no matter what law is eventually passed.

I know if I say "don't wait" to get your will or trust reviewed, most of you will wait and not do anything about it. But you should know that these out-of-date estate tax provisions in your will or trust can create all sorts of problems and unintended results. Make a resolution to get your estate plan in order. It will make a huge difference. What better legacy can you leave to your family than having all of your affairs in order?

Call (720) 200-4025 now or email us to find out how our attorneys can advise you on your estate planning.