Wealth Advisory Group

Update

MetLife

Estate Tax Repeal Update - December 2009
- What Happens Next?

As a consequence of the Economic Growth and Tax Relief Reconciliation Act of 2001(EGTRRA), the estate and Generation Skipping Transfer ("GST") taxes, but not the gift tax, are set to be repealed for one year beginning January 1, 2010. Since Congress has been unable to agree on either temporary or permanent estate tax legislation during the past 8 years, repeal is actually upon us. In addition to the repeal of the estate tax, for decedents dying after December 31, 2009, the basis of property acquired from a decedent is the lesser of the decedent's adjusted basis or the fair market value of the property on the decedent's death. Essentially, the current "stepped up" basis regime is eliminated and beneficiaries will now have the same (carryover) basis as the decedent.

EGTRRA also included a "sunset" provision that eliminates all of the changes the Act made at the end of 2010. Many of the provisions of EGTRRA (for example qualified plan and IRA changes) have already been made permanent but the estate and GST tax repeal and carry over basis regime have not been addressed by Congress. Absent any legislative action by Congress in 2010, the estate tax repeal and carry over basis regime will sunset and we will revert back to pre-EGTRRA rates on Jan 1, 2011. This means we will return to a $1,000,000 (unified) estate or gift exemption and a $1,000,000 GST exemption with a top rate of 55% (60% for estates between $10,000,000 and $17,184,000).

Estate & Gift Tax Rules for 2010 Under EGTRRA

From January 1 until December 31 2010, the estate and Generation Skipping Taxes are repealed. However, the gift tax remains. The gift tax will continue to have a $1,000,000 exemption and an annual exclusion of $13,000. The maximum gift tax rate will be 35% instead of the 2009 rate of 45%. The reason Congress retained the gift tax is to eliminate income tax avoidance by taxpayers who could transfer assets to people or entities who may be in a lower income tax bracket.

Carryover Basis Rules for 2010 Under EGTRRA

From January 1, 2010, until December 31, 2010, the §1014 step up in basis at death is eliminated and is replaced with a modified carry over basis under IRC §1022(a)(2). Thus, basis is not stepped up (but may be stepped down to fair market value) at death. There are two exceptions to the carry over basis rules: a) for assets transferred to a surviving spouse or a QTIP trust, up to $3,000,000 of additional basis may be allocated to those assets and b) up to $1,300,000 can be allocated to increase basis on transferred assets.  For a married individual both of these basis increases would be available. For unmarried individuals, only the $1.3 million additional basis allocation would be available.

Potential Congressional Action

As we head into 2010, what action Congress will take on the estate tax remains very much up in the air.  The House has introduced several bills that would make the 2009 rules ($3.5 million exemption and 45% rate)permanent. The Senate, however, seems to lean toward having a higher exemption and a lower rate (potentially $5.0 million and 35%). There are also the unresolved issues of possibly indexing the exemption for inflation, re-unifying the gift and estate exemption amounts and allowing spouses to carry over any unused exemption at the first death. In addition, growing budget deficits due to the economic downturn and subsequent economic stimulus spending bills raise the potential for the exemption to be lowered to less than the 2009 rates. It is also possible that repeal could stay in place for all of 2010 and we would return to the pre-EGTRRA rules in 2011. Essentially, Congress will be starting the estate tax discussion all over again. There does seem to be agreement in Congress for repealing the carry over basis regime and retroactively returning to a stepped up cost basis at death.

A major question to be answered by Congress in 2010 is whether to make any return of the estate tax legislation retroactive to January 1, 2010. Some members of the House have indicated that they intend to do so, while other members of Congress express concern that retroactively reinstating a repealed estate tax would be unconstitutional. This creates a tremendous amount of uncertainty as to what to do with estates of people who die before any legislation is enacted.

Uncertainty for Clients Dying Before New Estate Tax Legislation is Enacted

The repeal of the estate tax creates many issues for clients that have planning already in place. For example, for those clients that have formula clauses in their wills or trusts, dying with a repealed estate tax may potentially trigger disposition of assets entirely to the credit shelter trust and not to the spouse based on how the specific formula clause is drafted. Not only would this likely not meet the client's objectives, it would also eliminate the availability of the $3 million additional basis allocation available for transfers to surviving spouses. For other clients, the formula clauses may cause their credit shelter trust to have no assets. This may not effectively meet the client's objectives either, especially if the estate tax is later imposed retroactively. This would cause the client to not effectively utilize their exemption amount and would be against the original intention of their documents.

The repeal of the GST and lowering of the gift tax rate may also present planning opportunities in 2010, but the specter of retroactive reinstatement of the estate and GST taxes may require caution until there is more certainty.

Because we do not know whether the estate tax will be reinstated retroactively (and whether this would even be constitutional), clients must seek qualified legal counsel to discuss their current estate plan and what options are available during the upcoming year. While we do not have answers at this time as to the future of the estate tax, clients should be made aware of the potential ramifications the estate tax repeal may have on their estate plans.

The Wealth Advisory Group will keep you updated on the status of estate tax legislation as we move forward into 2010.

Pursuant to IRS Circular 230, MetLife is providing you with the following notification: The information contained in this document is not intended to (and cannot) be used by anyone to avoid IRS penalties. This document supports the promotion and marketing of insurance products. You should seek advice based on your particular circumstances from an independent tax advisor.

MetLife, its agents, and representatives may not give legal or tax advice. Any discussion of taxes herein or related to this document is for general information purposes only and does not purport to be complete or cover every situation. Tax law is subject to interpretation and legislative change. Tax results and the appropriateness of any product for any specific taxpayer may vary depending on the facts and circumstances. You should consult with and rely on your own independent legal and tax advisors regarding your particular set of facts and circumstances.