Where Is a Crystal Ball When You Need One?

By Janet Boller, CPA (Dec, 2009)

The American public is very much aware that under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) the estate tax and the generation-skipping transfer tax (GST) are scheduled to be repealed effective January 1, 2010. We are also aware that there was a ten-year "sunset provision" attached to the EGTRRA legislation. Therefore, effective January 1, 2011 the estate tax and the generation-skipping transfer tax will be governed by pre-EGTTRA law (i.e. $1,000,000 applicable exclusion amount and 55% maximum estate GST tax rate).

When the EGTRRA legislation was enacted in 2001, general consensus was that "soon" Congress would enact legislation to substantially overhaul, if not permanently repeal, estate taxes. Repeal has been within reach several times over the last ten years. Each time some event, such as post-September 11, 2001 security measures and Hurricane Katrina in 2005, has diverted Congress's attention. Still today, Congress is consumed with the issues of the economy and health care. As we get closer to the "drop dead" date (pun intended), speculation as to "what-if" becomes more intense. 

In 2009, under EGTRRA, we have benefited from a $3,500,000 applicable exclusion amount and a 44% maximum estate and GST tax rate. The estate tax is imposed on the total of a decedent's assets at death plus the decedent's lifetime taxable gifts, with credit for gift taxes previously paid. The state death tax credit against federal estate tax has been phased out as of 2005, replaced by a state death tax deduction. New York State decoupled from its "pick-up" estate tax as a result of the federal credit phase-out. The New York estate tax exclusion amount remains $1,000,000 for years 2002 and after.

Under EGTRRA, effective 2010, the federal estate tax will be repealed. There will be no general "step-up" of inherited asset basis to an appreciated date-of-death value. The general "step-up" will be replaced by a limited allowance for asset "step-up" to various beneficiaries. Otherwise, inherited assets will carry over their basis based on the lesser of the decedent's basis in that asset or fair market value of the asset at date of the decedent's death. Subsequently, upon its return on January 1, 2011 the federal estate tax will again be based on pre-EGTRRA law. "Step-up" of inherited appreciated assets will be reinstated, and the state death tax credit (as opposed to a deduction) will be available again.

Many, if not the majority, of opinions speculate that Congress will act at the eleventh-hour, fifty-ninth minute, to extend the federal estate tax at its 2009 parameters into 2010 if not longer. Few will deny that Congress is looking for revenues to bolster its current efforts to revive the economy, pass health-care legislation, manage two wars, address the deficit, etc, and the estate and GST tax may be considered easy-pickings. As Louis XIV's Controller-General of Finance once said, "The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least possible amount of hissing." Although it is argued that the federal estate tax is not as lucrative as it appears, it would not be politically advantageous to allow a tax benefit to the "wealthy" in lieu of tax increases or reduced allowances to others. Indeed, both President Obama and both houses of Congress have proposed 2010 budgets which include revenue sources from estate and GST taxes at their 2009 levels.

Other proffered thoughts are to allow portability of the applicable exclusion amount between spouses, an inflation adjustment to the applicable exclusion amount, and a minimum ten year term on grantor retained annuity trusts. Increasingly under fire is the discounts in valuing transfers of interests in family controlled entities to other family members (e.g. discounts for lack of control or lack of marketability). The IRS has had measurable success in attacking such discounts where control and benefit is retained by the donor, and strict business purpose and practices have not been established. And some suggest allowing the estate and GST tax to return to pre-EGTRRA law, as scheduled in 2011, in order to increase that revenue source. Greater amounts of wealth may become subject to estate tax as baby-boomers and their parents pass away. 

Ever the optimists, there are those that hold out hope that Congress will enact permanent estate and GST tax in 2009, establishing a stable base for estate projections. Estate-planners are weary of answering client questions with "it depends." As the debate continues, uncompromising gridlock may be the answer to a politician's prayers, especially as the November 2010 election looms on the horizon: "It's the other guy's fault," as opposed to being the bad-guy who increased taxes.

Rapid year-end legislative action would prevent the temporary repeal of the estate tax in 2010. On Thursday, December 3, 2009, the House passed the Permanent Estate Tax Relief for Families, Farmers and Small Businesses Bill of 2009 (H.R. 4154) to permanently extend the maximum estate tax rate of 45% and the $3.5 million applicable exclusion amount ($7 million for married couples). The stepped-up basis rules would remain intact, as will the State death tax deduction, and various other estate tax provisions. The Generation-Skipping Transfer Tax would also be made permanent at its 2009 assessment. The House bill does not alter the current gift tax provisions: $1 million exclusion amount, 45% maximum tax rate. It is uncertain if the Senate will address the House bill prior to year-end.


In comparison to the turmoil over the future of the estate and GST taxes, the gift tax provisions seem dry. The federal gift tax will not be repealed in 2010 under EGTRRA. However, there has been some talk of bringing the gift tax lifetime exclusion into accord with the estate tax applicable exclusion amount should that allowance remain greater than $1,000,000. The lifetime gift tax exclusion reached a maximum $1,000,000 in 2002 and remains so currently. The annual exclusion for gifts of present interest, which is indexed for inflation, is $13,000 per donor/per donee for 2009, and will remain the same for 2010. The marital deduction for transfers to non-U.S. citizen spouses is set at $134,000 in 2010 (increased from $133,000 in 2009). New York repealed its gift tax in 2000.

While we do not possess that magic crystal ball, we do encourage you to talk to your Dermody, Burke & Brown advisor about your own estate (and gift!) tax situation and how you might plan for the future.


The information reflected in this article was current at the time of publication. This information will not be modified or updated for any subsequent tax law changes, if any.

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