Recently, there have been some major estate and income tax law changes that may affect our clients, some of which are discussed below.
If you are married and your combined estates exceeded the federal estate tax exemption amount as it existed at the time you signed your estate planning documents, it is probable that your estate planning documents divide the estate of the first spouse to die into two portions. One portion is equal to the unused estate tax exemption amount of the first spouse to die ($3.5 Million as of 2009). The other portion is equal to what is called the “optimum” marital deduction. Neither portion is subject to estate tax when the first spouse dies even if there is an estate tax law in existence because the estate tax exemption portion (sometimes called the “credit shelter” or “bypass” portion) escapes tax since it takes advantage of the estate tax exemption of the spouse dying first. The estate tax exemption portion also escapes estate taxation when the surviving spouse dies. The marital deduction portion is not subject to estate tax when the first spouse passes on, but is subject to estate tax when the surviving spouse dies. This is the common way most married couples have disposed of their wealth for many years. We continue to believe this plan is appropriate for most of our married clients. However, as discussed below, provisions in the tax law which became effective as of January 1st of this year and are only applicable during the year 2010, suggest that it may be appropriate for you to modify your estate planning documents.
This year (2010), there will be no federal estate tax and no federal generation skipping transfer tax. Currently, there is also no North Carolina estate tax, although the Legislature could act at any time to impose such a tax. For our clients domiciled in South Carolina, there is also no South Carolina estate tax. Because several provisions of your documents may be phrased in terms of tax concepts that are no longer in effect, such as the estate tax exemption amount and marital deduction (as discussed above), or the generation skipping transfer tax exemption amount (if your plan provides for “generation-skipping” for your family), there may be some question as to what your documents may mean and how your property is to be disposed of since these tax concepts do not apply during this year.
Another change that is scheduled to take effect in 2010 relates to the income tax basis of inherited assets. This change affects both married and single clients. Income tax basis is the value from which gain or loss on assets sold is measured. Prior to 2010, as a general rule, the income tax basis of an asset passing through an estate is its current fair market value on the date its owner dies. However, for the year 2010 only, this automatic change in basis will not apply. Rather, subject to limited exceptions, the lower of the deceased owner's income tax basis in his or her assets or the fair market value of the assets as of the date of death will “carry over” to the person inheriting the assets. It may be appropriate for your documents to be revised in order to take into account the possibility of carry over basis and the ability of the executor to elect to step up the basis in certain circumstances.
There is a possibility that at some point this year Congress and/or state legislatures will address the 2010 estate tax law and make changes, some of which could be effective retroactively. However, there is no guarantee that Congress or state legislatures will enact any estate tax reform this year. This article is simply an effort to make you aware of the uncertainty in the tax law at this time.
Craig Dalton, an attorney no longer with Poyner Spruill, was the original author of this article.