By failing to pass any new estate tax legislation before January 1,2010, Congress  allowed the estate tax to expire pursuant to a "sunset" provision included in tax legislation enacted in 2001. As a result, in the absence of further changes by Congress, no estate tax would be applicable with respect to estates of decedents dying in 2010, regardless of the size of the estate.

This year the discussion of Estate Taxes have been one of main concern.  this will summarize recent developments in the estate tax law that may be of  interest to you. The impact, if any, of these developments on your estate plan should be determined after reviewing your file. We would be pleased to do so, but will undertake such review only upon your express authorization.

However, it is widely believed that the estate tax will be reinstated some time this  year and that the reinstated tax could apply retroactively with respect to decedents dying at any time during 2010. Needless to say, it is difficult to predict how or when Congress will act and whether a retroactive reinstatement of the estate tax would withstand judicial challenge.

In the absence of further action by Congress, the estate tax will be reinstated  pursuant to the provisions of the 2001 tax legislation as of January 1,2011, at which time an estate tax (with a reduced estate tax exemption and higher top marginal tax rate) would again be applicable with respect to decedents dying on or after that date.

There are situations in which action may be appropriate to ensure that unforeseen consequences do not occur if the estate tax is inapplicable at the time of a client's death. One example would be an estate plan which uses a formula based upon the estate tax exemption amount to divide assets among different classes of beneficiaries, such as children and the surviving spouse. Similar issues could arise with respect to allocations between charitable beneficiaries and family members pursuant to a formula based on the estate tax charitable deduction.

For some time the transfer tax has included an additional tax known as the  generation-skipping transfer ("GST") tax. As the name suggests, the GST tax generally applies with respect to transfers to grandchildren or more remote descendants in excess of a GST tax exemption amount ($3.5 million for 2009 transfers). Like the estate tax, the GST tax has been repealed effective January 1, 2010, and the GST tax is now inapplicable with respect to any transfers made during 2010. If the GST tax is not reinstated retroactively, certain estate plans could require changes to avoid adverse or unforeseen consequences in the event of a 2010 death. One example would be an estate plan which allocates assets between grandchildren and other beneficiaries based on the GST tax exemption.

With a few exceptions, another consequence of the recent changes to the estate  tax laws is the temporary elimination of the unlimited adjustment to the income tax basis of assets passing on death to the asset values as of the date of death. In the absence of further legislation, the income tax basis of assets passing on death for estates of decedents dying in 2010 will be the lesser of their fair market value or adjusted cost basis as of the date of death. However, the executor of the decedent's estate will be allowed to increase the income tax basis of appreciated assets up to such assets' fair market value, but the aggregate increase is limited in amount to $1.3 million (or $3 million for a surviving spouse).

Even though the estate tax has been temporarily repealed, the gift tax has not.  However, the gift tax rate has been reduced to 35% for 2010 gifts. The lower gift tax rate may provide a unique opportunity to clients who have been contemplating asset sales to their children or grandchildren (or "defective" trusts for their benefit) or who may wish to make substantial gifts, particularly to grandchildren. It may even be possible to structure a taxable transaction which could essentially be undone in the event the higher gift tax rate is retroactively reinstated. If you are interested in this type of planning, please contact us for more details.

As always, Call our firm to discuss your particular needs or questions.