As of January 1, 2010, there is no federal estate tax for decedents dying in 2010. Congress could reinstate the federal estate tax retroactively in 2010, perhaps as part of broader tax reform, or take no action, in which case the federal estate tax will be reinstated in 2011 but with a reduced exemption of $1,000,000 from the 2009 $3,500,000 exemption.
It may be uncertain how the provisions of your estate planning documents will be interpreted if there is no estate tax. This is because common provisions in estate plan documents are phrased in terms of tax concepts, such as the estate tax exemption, marital deduction and generation-skipping tax. These tax concepts are not in the law this year. For most clients who have reviewed and updated their estate plans in the last several years, this may not be an issue, but for those who have not reviewed their documents in many years, there may be some question as to what your documents mean and how the property is disposed of. That in turn may cause tax questions to arise.
Another change that is in effect for 2010 relates to the income tax basis of inherited assets. Income tax basis is the value from which gain or loss on assets sold is measured. Under the law in effect through December 31, 2009, the general rule provided that the income tax basis of an asset was changed to the decedent’s date of death value, the so-called “step up in basis.” This automatic change in basis will not occur in 2010. Rather, with some exceptions, the deceased owner’s income tax basis will “carry over” to the persons who inherit the assets. It may be appropriate for your documents to be revised in order to take into account the possibility of carry over basis.