February 12, 2010 - As a result of the 2001 Tax Act, officially known as the Economic Growth and Tax Relief Reconciliation Act of 2001, federal estate and generation-skipping transfer taxes have been repealed for 2010. Under the 2001 Tax Act, unless Congress acts in the meantime, both taxes will be reinstated in 2011 — with a lower exemption amount and a higher maximum tax rate. In the meantime, the federal gift tax has not been repealed, and the rules that have historically applied to provide for a step-up in the basis of a decedent’s assets have been replaced with a new, more restrictive and less generous, carry-over basis regime. To view schedule, click here.

While all of this confusion has been unfolding, many in Congress have expressed their intention to address the federal estate tax issues in early 2010. Some have suggested that they would support reinstatement of the law as it existed on December 31, 2009, before the repeal took effect, with the reinstatement being retroactive to January 1, 2010. Others have suggested that it would be unconstitutional to make the reinstatement retroactive. Needless to say, it is impossible to predict if or when Congress will act, and, if it does, what the result will be.

In light of the uncertainty created by the repeal, it is important to review and possibly revise your estate planning documents to make certain that neither the repeal of the 2009 laws, nor the potential reinstatement of the pre-2002 laws in 2011, would have a negative impact on your planning or frustrate your intentions. Those who are most likely to be affected by the repeal, or the reinstatement, are individuals whose documents create marital, credit shelter or generation skipping trusts where funding is directed by way of a formula based on federal taxes. For example, a person’s revocable trust or will could provide that the credit shelter trust (also referred to as a bypass trust or a family trust) is to be funded with “the amount which can pass free of federal estate tax.”

Since 2005, Washington state has had a stand-alone estate tax which is completely unaffected by the repeal of the federal estate tax and will continue to apply in 2010 and thereafter. The repeal is less likely to have an impact on the trusts or wills of Washington state residents where the funding formula takes the state estate tax into consideration and is based on, for example, “the amount that can pass free of both federal and state estate taxes.”

Please let us know if you would like to schedule a meeting to review your estate planning documents in light of the current, uncertain, state of affairs.

For additional information, please contact Pamela McClaran (206.447.4697), chair of Foster Pepper’s Estate Planning practice group.