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Summer 2010

Estate Planning Bulletin


Dan Duncan, a Texas businessman, died in April of this year with an estimated net worth of $9 billion. George Steinbrenner, owner of the New York Yankees, died in July with an estate estimated at $1.15 billion. Astonishingly, their estates will owe no federal estate tax because it has been repealed for 2010. If Dan Duncan had died in 2009, his estate would have paid approximately $4 billion in federal estate tax. If he died under the tax laws presently due to go into effect in 2011, his estate would pay over $5 billion in federal estate tax. What is going on?

  • As a reminder, the federal estate tax is a one-time tax imposed on the value of assets owned or controlled by an individual at death. The law has set an amount as exempt from these taxes, and during recent years this amount has been a moving target. Amounts transferred at death to the decedent’s spouse and charity are not taxed.
  • Unless Congress passes an estate tax revision that is retroactive to January 1, 2010, everyone dying during 2010, including Dan Duncan and George Steinbrenner, can leave all their assets to their families free of federal estate tax.
  • Last year the federal estate tax was a flat 45% on the value of assets exceeding $3.5 million passing to anyone other than the decedent’s spouse or charity. Next year, unless Congress acts, the federal estate tax swings back to its pre-2001 rules, with an exemption of $1 million and graduated tax rates up to 60%.*
  • For people dying in 2010, the capital gain step-up in basis rules (which generally cause inherited property to have a date of death tax basis) are replaced with an adjusted “carry-over basis.” This means that Dan Duncan’s heirs inherit his billions with Mr. Duncan’s basis, so that upon sale capital gains taxes (currently at 15%) will be payable on nearly all assets in his estate. The 2010 rules do permit an executor to elect some basis step-up, which protects smaller estates from capital gains on the sale of inherited assets.

How did we get here, and where are we going?

  • In 2001, Congress passed a law that created significant, phased-in increases in the federal estate tax exemption, lower tax rates and the repeal of the federal estate tax in 2010. In order to keep the “cost” of these tax reductions down, the law expires January 1, 2011.
  • After the 2006 and 2008 elections it seemed quite unlikely that Congress would permit the estate tax to disappear for the year 2010, and we expected that Congress would enact a new estate tax law effective on January 1, 2010. To date, that has not happened, and now most experts predict that there will be no action on this issue until 2011 or later. If Congress does not act, the pre-2001 exemption of $1 million will be the law starting next year.
  • Meanwhile, the Massachusetts estate tax still has a $1 million threshold amount, which means that an estate owes Massachusetts estate tax only when the value of assets passing to persons other than the decedent’s spouse or charity total more than $1 million. This is not expected to change in the near future.

How does this affect your estate plan?

  • For many of our married clients, estate planning documents include trusts for the first to die that divide the estate into federal and state marital deduction trusts and a residuary (or “family”) trust. If your trust predates 2001, your formula may be tied to the “federal minimizing amount,” which for 2010 deaths may result in the entire estate being allocated to one trust. This could trigger unnecessary Massachusetts estate taxes on the first death and may result in an unfunded trust for the surviving spouse.
  • Estate plans drafted for states other than Massachusetts having formulas tied to the federal estate tax exemption could also result in unnecessary Massachusetts estate taxes and an underfunded gift to the surviving spouse for a death in 2010.
  • Individuals whose plans maximize gifts to grandchildren or other plans with generation-skipping transfers could also have unexpected results for gifts or death in 2010 because the law has also repealed the federal generation-skipping transfer tax for 2010.

What does the future hold?

As the year goes along, it is less likely that Congress will enact retroactive estate tax reform, and it is more and more likely that Congress will permit the 2011 law to go into effect, with a $1 million estate tax exemption and top rate of 60%. If and when Congress acts, an exemption amount between $3.5 million and $5 million and a maximum rate of 35-45% may well emerge. While many individuals are waiting to see what Congress does before deciding whether documents need to be amended, for some people a revised plan makes sense now.

If you have questions about the impact of this situation on your estate plan, please contact any member of our Estate Planning and Administration Department:

Kathleen L. Bernardo 413-272-6295 [email protected]
William E. Hart [email protected]
Elizabeth H. Sillin 413-272-6296 [email protected]
Ronald P. Weiss 413-272-6259 [email protected]

To comply with U.S. Treasury regulations, we inform you that any tax advice contained in this newsletter is not intended or written to be used, and cannot be used, for the purpose of avoiding tax-related penalties under the Internal Revenue Code or promoting, marketing or recommending to another party any tax-related matters advised here.

* The tax rates range from 18% to the maximum graduated rate of 55% for taxable estates of $3 million and over, plus a 5% surtax on taxable estates of over $10 million. The surtax applies to the portion of a taxable estate that is in excess of $10 million and less than $17.184 million. The amount of that surtax brings the effective tax rate on the entire taxable estate to 55%.