The Federal Estate Tax: Rumors of its Demise Remain Greatly Exaggerated
December 31, 2009
By
Michael L. Fay,
Brooke L. Manfredi
As you may have read in the press, Congress has astonished many estate planning practitioners by failing to take action to prevent the repeal of the federal estate and generation-skipping transfer ("GST") taxes, which is scheduled to take effect on January 1, 2010. Nevertheless, Congressional leaders have promised that estate tax reform is on the agenda for 2010, and that they intend to make any such reform retroactive to January 1.
Current Law
In 2001, Congress enacted estate tax reform legislation under which federal estate and GST tax exemptions were increased, in stages, from $675,000 in 2001 to $3,500,000 in 2009, and the highest marginal estate tax rates were reduced, in stages, from 55% in 2001 to 45% in 2009. The legislation also repealed the estate and GST taxes, but only for one year, 2010, after which the law is scheduled to return to its pre-2002 structure.
Potential Legislative Changes
While it is impossible to predict with precision the timing and specifics of any estate tax legislation, it is likely that the 2009 structure ($3,500,000 exemption and 45% flat tax) will be extended through December 31, 2010. What is less certain is the structure of the law after 2010. Certain elements, such as the unlimited marital and charitable deductions, are almost certain to be retained, but the amount of exemptions and the applicable tax rates remain to be negotiated—up or down.
Retroactivity
The Supreme Court has, as recently as 1994, upheld retroactive changes to the tax laws. However, there can be no assurance that retroactivity of any new tax legislation will be upheld by the current Supreme Court, particularly in the absence of a formal statement of Congressional intent to enact legislation next year. As a result, we caution against taking any action based primarily on the assumption that, at least early in 2010, there will be no estate or GST tax, and that retroactive application of any subsequent legislation will be prohibited by the Courts.
Conclusion
It is disappointing that Congress has failed to act thus far, and there will undoubtedly be a period of uncertainty and confusion in 2010 before new tax legislation is enacted. However, there is no reason to celebrate the demise of the estate tax or to fear that the 2001 rules will return. We shall continue to monitor any pending legislation and report back to you when we receive reliable information regarding Congress's intentions.
In the meantime, please contact any member of WilmerHale's Private Client Practice Group if you have any questions or concerns regarding the effects of Congress's inaction on your estate plan.
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IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.