Despite last minute efforts by Congress in December of 2009, we now have significant uncertainty for estate, gift, and generation-skipping transfer (GST) tax laws in 2010 that could dramatically impact existing and future estate plans. Members of Congress have pledged to act quickly in 2010 to clarify these taxes, with any legislation expected to be retroactive to January 1, 2010. It is not yet clear what they intend to do or when they will get it done. If Congress is unable to pass new legislation quickly regarding these taxes for 2010, you should contact a member of Doerner, Saunders, Daniel & Anderson’s Wealth Management Practice Group for a review of your estate plan to determine whether the 2010 estate tax repeal, 2010 repeal of the basis step-up on appreciated property owned by a decedent at death, and other 2010 tax law changes have altered your existing estate plan.
Background on Transfer Taxes
For Oklahoma residents and property owners in 2010, the transfer tax system consists of a federal gift tax. The federal estate tax and GST tax have been repealed but will be reinstated in 2011 absent new legislation. If you live in or own property in another state, that state’s transfer tax laws may also apply. Effective January 1, 2010, the Oklahoma estate tax has been repealed. Unlike the federal estate tax, there is no current legislative activity indicating that the Oklahoma estate tax will be reinstated in the future. Oklahoma does not have a gift tax or GST tax.
Federal Transfer Tax Law as of January 2010
Estate Tax
| Year | Exclusion | Top Rate |
| 2001 | $675,000 | 55% |
| 2002 | $1,000,000 | 50% |
| 2003 | $1,000,000 | 49% |
| 2004 | $1,500,000 | 48% |
| 2005 | $1,500,000 | 47% |
| 2006 | $2,000,000 | 46% |
| 2007 | $2,000,000 | 45% |
| 2008 | $2,000,000 | 45% |
| 2009 | $3,500,000 | 45% |
| 2010 | Repeal | Repeal |
| 2011 | $1,000,000 | 55% |
Gift Tax
| Year | Exclusion | Top Rate |
| 2001 | $675,000 | 55% |
| 2002 | $1,000,000 | 50% |
| 2003 | $1,000,000 | 49% |
| 2004 | $1,000,000 | 48% |
| 2005 | $1,000,000 | 47% |
| 2006 | $1,000,000 | 46% |
| 2007 | $1,000,000 | 45% |
| 2008 | $1,000,000 | 45% |
| 2009 | $1,000,000 | 45% |
| 2010 | $1,000,000 | 35% |
| 2011 | $1,000,000 | 55% |
GST Tax
| Year | Exclusion | Top Rate |
| 2001 | $1,060,000 | 55% |
| 2002 | $1,100,000 | 50% |
| 2003 | $1,120,000 | 49% |
| 2004 | $1,500,000 | 48% |
| 2005 | $1,500,000 | 47% |
| 2006 | $2,000,000 | 46% |
| 2007 | $2,000,000 | 45% |
| 2008 | $2,000,000 | 45% |
| 2009 | $3,500,000 | 45% |
| 2010 | Repeal | Repeal |
| 2011 | $1,000,000 +CPI adj. | 55% |
In 2001, Congress passed the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) with sweeping tax law changes. As the tables above reflect, EGTRRA increased the gift tax exclusion to a fixed $1 million and gradually increased the estate tax exclusion and GST exemption to $3.5 million by 2009, while simultaneously reducing the tax rate to 45%. Effective January 1, 2010, EGTRRA also provides for a one year repeal of the estate tax and GST tax and a one-year repeal of the basis step-up on appreciated property owned by the decedent at death, replacing them with a modified carry-over basis regime. However, EGTRRA expires in 2010, so that for 2011 and beyond, the transfer tax laws revert back to their pre-2001 condition that includes a $1 million estate, gift, and GST exemption with a 55% tax rate and an additional 5% surtax on certain large estates, and a return of the basis step-up.
Recent Legislative Developments
Doerner, Saunders, Daniel & Anderson has closely monitored the bills introduced in Congress in 2009 that impact these transfer taxes. Proposed options include: (1) a one-year extension of the 2009 $3.5 million estate and GST tax exemption and 45% rate, with a comprehensive revision of the estate and gift tax later in 2010; and (2) a permanent extension of the 2009 estate and GST tax $3.5 million exemption and 45% rate (which the House passed on December 3, 2009, but which was not considered by the Senate before it adjourned for the year in 2009). Another option is for Congress to do nothing, which would mean the federal estate tax and GST tax would be repealed in 2010 but be reinstated at pre-EGTRRA levels.
Repeal of the federal estate tax and GST tax in 2010 may be retroactively revoked in early 2010. Members of Congress who have been involved in the attempts to address these transfer tax issues intend to enact legislation in early 2010 that would apply retroactively to January 1, 2010. In other words, even if a person died on January 20, 2010, when no federal estate tax law is in effect, later in 2010 Congress might rewrite the tax laws retroactively to impose an estate tax for that decedent. Whether a retroactive reinstatement of the estate and GST tax effective January 1, 2010 will survive constitutional challenge remains a subject of fierce disagreement, and if attempted, will certainly result in litigation.
Review Your Estate Plan
Until Congress takes action, there will be uncertainty and confusion in the federal transfer tax system. House and Senate members intend to act on these transfer taxes in early 2010, but a major hurdle will be finding 60 votes in the Senate to move the legislation forward.
Repeal of the federal estate tax and GST tax for 2010 could rewrite your existing Will or Revocable Trust. Many Wills and Revocable Trusts contain so-called “credit shelter” bequests, which generally allow each individual to maximize the amount of property he or she can transfer free of Federal estate tax. If your Will or Revocable Trust contains a “credit shelter” bequest, and you die while there is no Federal estate tax in effect, it is possible that a court could interpret the bequest as covering all the property passing under the Will. (It is also possible that a court could interpret the bequest as being void, and unclear how a Court would rule in case of a retroactive reinstatement of the Federal estate tax.). To remove this uncertainty, we recommend that you consider executing a Codicil to your Will or an Amendment to your Revocable Trust to fix the amount passing under the bequest if there is no Federal estate tax in effect when you pass away. Depending on your estate plan, that amount might be (a) $3.5 million or another dollar amount that you select, or (b) a percentage of your estate that you specify, or (c) zero.
Estate tax repeal may also affect any gifts that you make to grandchildren. A Will or Revocable Trust which provides that the grandchildren will receive “the largest amount which can pass free of the GST tax” may result in the grandchildren receiving the entire estate. This outcome could result from the fact that the GST tax was repealed along with the estate tax.
In another commonly seen situation, the Will or Revocable Trust makes a gift to a charity in an amount calculated to zero out any liability for the estate tax. Such a formula may now be meaningless, with the result that the charity could receive nothing.
These are just a few of the many examples of unintended consequences in certain estate planning situations. Your estate planning documents may or may not be so affected.
Doerner, Saunders, Daniel & Anderson’s Wealth Management Practice Group is closely monitoring the proposed transfer tax legislation in Congress, and we hope this confusion and uncertainty can be clarified by Congress soon. If you have any questions about any of the issues outlined above or a concern that you would like to discuss further, or if you would like us to review your estate planning documents in light of the estate tax repeal, please contact one of the following Doerner, Saunders, Daniel & Anderson attorneys who specialize in trusts and estates:
Jeffery C. Rambach
jrambach@dsda.com
918-591-5202
Harry V. Rouse
hrouse@dsda.com
918-591-5325
Kassandra M. Bentley
kbentley@dsda.com
918-591-5259
Varley H. Taylor, Jr.
vtaylor@dsda.com
918-591-5288
This article is not intended or written to be used and cannot be used for the purpose of avoiding any federal tax penalties.
By Jeffery C. Rambach, jrambach@dsda.com
