Grant Glackman

Under the provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the estate tax and GST tax were repealed for 2010 but scheduled to return in 2011, with exemptions of only $1 million and a top tax rate of 55 percent. The gift tax rules limiting lifetime gifts to $1 million were not changed. In addition, there are limitations imposed on the amount of income tax basis that can be stepped up to date-of-death values.

While the House passed legislation December 2, 2009, to permanently extend the $3.5 million exemption and 45 percent top tax rate in effect for 2009, the Senate took no action before the year-end adjournment. Senate members disagree as to the exemption amount and top tax rate. Certain members have indicated action will be taken quickly in 2010 to pass legislation, which would be retroactive to the beginning of the year. Any retroactive change, however, could bring with it constitutional challenges by those affected.

Most commentators say it is likely the 2010 legislation will maintain the estate and GST tax in some form and make the effective date retroactive to the beginning of the year. However, in the current political environment other possibilities exist. One would be to pass legislation without a retroactive date. Another would be to do nothing and allow the much lower exemption amounts and higher tax rates to kick in during 2011. From a strict estate tax standpoint, both of these later options would clearly benefit those large estates where death occurs during the repeal window.

Planning in the current environment will be extremely difficult given the threat of any retroactive changes. In addition, for people dying during the existing repeal, the effect on their estate and heirs could be dramatic, depending on the ultimate changes and effective dates enacted. An example: If someone leaves the maximum exclusion amount to children and the excess to his or her spouse, the spouse could receive nothing because the exclusion is currently unlimited.