Estate Tax Update – What has Congress Done, and Where do We Stand Now?


As you probably heard in the news, the Congress has passed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, and the President signed it into law on 12/17/2010. This new law has significant estate tax implications, and has resolved much (but not all) of the chaos that has surrounded the “repeal” of the federal estate tax for 2010 deaths only. The primary purposes of this law were to extend “emergency” unemployment benefits and income tax cuts passed during the Bush administration that were expiring; it was more than a little surprising to learn that it also included major estate tax revisions that we’ve been expecting but had not seen for several years.

The good news is, the “applicable exclusion amount” has been increased to $5,000,000 for deaths in 2010, 2011, and 2012. This exclusion, the amount that can pass free from federal estate tax, was most recently at $3,500,000 for 2009. Even better, the rate has been reduced to 35% for all amounts subject to federal tax.

Without this Act, there was no federal estate tax for deaths in 2010 ONLY. Beginning 1/1/2011, the tax would have returned, and the applicable exclusion amount would have been all the way down to $1.0 million; the top rate would have been 55%. However, for 2010 decedents, the one tax BENEFIT of death – unlimited step-up in basis of inherited property to fair market value at date of death – would have been gone. Instead, there was to be a partial step-up of up to $1,300,000 over the decedent’s basis for any assets, plus an additional $3,000,000 for assets passing to a surviving spouse. With the Act, we’re generally back to an unlimited step-up in basis to fair market value at death.

In order to address concerns regarding the constitutionality of a retroactive (for 2010) reinstatement of a significant tax, for estates of decedents with 2010 dates of death ONLY, taxpayers may optionally elect to have NO estate tax and NOT have unlimited step-up in basis. The default under the Act is the reinstated tax with a $5.0 million exclusion. The IRS is to specify the form and manner of the election out of the new law, and as of this writing has not done so. Prior to the passage of the new Act, a draft IRS Form 8939 to allocate the limited step-up in basis had been released; this form was going to be due no later than the filing date of the decedent’s final 2010 income tax return – normally April 18, 2011. Exactly when this form will be required and how estates will “opt out” of the reinstated estate tax for 2010 deaths is not yet 100% clear.

One more piece of good news comes with this Act: A one-time delay in the due date of federal estate tax for 2010 decedents. The return and tax is normally due nine months after death; for 2010 decedents only, it is instead due on the later of nine months after death or nine months after the date of enactment.

There’s also a provision that provides for some “portability” of any unused portion of a first spouse’s applicable exclusion.

There is one truly bad piece of news: With this Act, Congress has now failed for a second time to make major changes to the estate tax permanent. The law still sunsets after 2012. It’s bad enough to patch income tax law (such as the alternative minimum tax “patch”) every one or two years. Estate planning requires forethought and, well, planning. Changing the rules frequently causes needless frustration, concern, and expense for taxpayers. Some plans are irreversible once put in motion, and some taxpayers, due to declining health, lose the capacity to make changes. This should be our clearest message to our legislators in this area: Come to a resolution all can live with, make it permanent, and leave it ALONE.

Lastly – with all of this talk about federal estate tax law, DO NOT forget the Maryland estate tax. It still applies to estates of Maryland residents (and non-Maryland residents with Maryland real estate or business assets) in excess of $1,000,000. This can be a significant tax: For a $2,000,000 estate, it’s almost a $100,000 tax, for a $3,500,000 estate, it’s just over $229,000, and for a $5,000,000 estate, it’ll be almost $392,000. Further, the State of Maryland requires a complete federal estate tax return with all appraisals and attachments, even though the IRS doesn’t even want it.

Obviously, the need to plan your estate (and to periodically review plans made, especially in light of changes in the law) remains. If estate tax planning should be a concern, you should work with a good attorney and accountant who specialize in this area to review or formulate your plan. At Balsamo, Stewart, Lutters & Ruth P.A., we are ready to help you with this process.