By Matthew S. Beard and Michael L. Kaufman

Based upon the best information available in late October, we anticipate that Congress will enact a bill by December 31, 2009, that will repeal both the one-year termination of the estate tax and the new carryover basis rules. It looks as though further action regarding the estate tax (if any) will be deferred to 2010.

Background

The tax law is currently in flux.  Specifically, for the estate tax the law is changing with respect to (1) whether the estate tax exists or is repealed; (2) the level of the estate tax exempt amount (the amount each individual can pass free of estate tax to any person); and (3) the basis of property acquired from a decedent.  For decedents dying in 2009, the estate tax exists, the estate tax exempt amount is $3,500,000, and the basis of property acquired from a decedent is adjusted, generally, to the fair market value of the property as of the decedent’s date of death.

2010

For decedents dying in 2010, unless or until changes are made in present law, the estate tax is scheduled to terminate for one year and, therefore, would not exist; the estate tax exempt amount would effectively be unlimited (since there would be no estate tax in 2010); and the basis of property acquired from a decedent would be subject to new complex basis provisions that generally provide for a carryover of the decedent’s basis in property.

Congress has approximately nine weeks to take action with respect to these tax changes.  In view of this rapidly narrowing window of time, contemplated Congressional action appears to be limited to the repeal of the one-year termination of the estate tax and the new basis rules taking effect in 2010.  Many bills have been introduced in 2009 to address this matter, including one introduced in mid-October by a bipartisan group in the House of Representatives.  We anticipate that Congress will enact a bill by 2009 year-end that will repeal the one-year termination of the estate tax and new basis rules, and provide for a continuation of the current $3,500,000 estate tax exempt amount for 2010.

2011

Current law calls for a restoration of the estate tax on January 1, 2011.  Accordingly, for decedents dying in 2011, the estate tax would exist, the estate tax exempt amount would be $1,000,000, and the basis of property acquired from a decedent would, generally, be adjusted to its fair market value at the time of death.  These rules could potentially cause many estates to unexpectedly pay estate tax in 2011.  For example, an estate of a single person with a $750,000 life insurance policy and a $500,000 house would potentially pay estate tax.  It is unclear at this point whether Congress will modify the present law for years beyond 2010, but if so, then such modification will most likely occur in 2010.

Next Steps

A review of your current estate plan may be needed to confirm that you are utilizing the tax benefits available to you.  Most tax-planning estate plans from Jackson Walker L.L.P. have been drafted to adjust for the fluctuation of the estate tax exempt amount from year to year and so should work under all the scenarios described above. However, even if the documents themselves work properly, a review of your current financial information may be needed to determine the impact the tax law changes have had on the funding of the gifts under your estate plan.  For example, if your plan was conceived when the estate tax exempt amount was $600,000, does it still do what you want if the estate tax exempt amount is $3,500,000?

For more information regarding this matter, please contact Matthew S. Beard at 214-953-5848 or mbeard@jw.com, Michael L. Kaufman at 214-953-5734 or mkaufman@jw.com, or any member of the Jackson Walker wealth planning section.