The Troubled Trust and Estate Profession Navigating Turbulent Times

By: Valerie L. Hamlet (Oct, 2010)

Most tax professionals that specialize in trusts and estates have never before experienced such an uncertain tax environment. Prior to 2010, estate and gift tax legislative changes were incremental in amounts and mostly predictable in nature. However, now the future looks bleak at best and alarmingly chaotic at worst.

Legislative History. In 2001, Congress passed the Economic Growth and Tax Relief Reconciliation Act (“EGTRRA”). Some positive effects of the legislation for taxpayers were:

  • An annual incremental increase in exemptions for Estate and Generation Skipping Transfer (“GST”) taxes
  • A decrease in the highest tax bracket
  • A step-up in basis for inherited property (beneficiary gets property with a new basis of fair market value on decedent’s date of death)

Unfortunately, any changes made in 2001 will no longer be in effect as of January 1, 2011. EGTRRA contains a “Sunset” provision that terminates its effects at the end of 2010. On January 1, EGTRRA is not only eliminated, but treated as if it never existed in the first place. This and other factors will create a great deal of confusion for families who lose a loved one.

For the estates of decedents dying in 2010, there is no estate tax or GST tax. The gift tax is unchanged in 2010 with an annual exemption of $13,000 per donee and a lifetime exemption of $1 million. At face value, this may seem to be a good thing, but it actually adds more confusion to an already complicated situation.

Some 2011 Effects of the “Sunset” Provision are:

  • Estate tax exemption is reduced to $1,000,000 (from $3.5 million in 2009)
  • GST tax exemption is reduced to $1,000,000 (from $3.5 million in 2009)
  • Highest tax bracket will increase to 55% for estate, gift and GST taxes (from 35% for gift tax and 45% for estate and GST taxes in 2009)
  • Loss of the “stepped-up” basis. Carryover basis in effect (beneficiary “inherits” decedent’s basis)
  • Complications for estates where a Word Formula is used to designate testamentary instruments as beneficiaries
  • Complications arise for some gifts that are made over a period of several years

Some questions that taxpayers may ask are:

  • What is the basis of the property I inherit?
  • What gain will I recognize on the sale of inherited property?
  • Will the decedent’s last wishes be honored if the will leaves a bequest using a word formula clause to calculate the amount of the bequest?
  • Will my estate pay an estate tax? If so, how much?
  • If I make a gift to a trust for the benefit of my grandchildren in 2010 when GST tax does not exist, will I owe a GST tax in 2011 when the tax is reinstated?
  • Do I need to pay a GST tax on gifts I made in previous years when those gifts were otherwise exempt under EGTRRA?

The current legislative situation creates confusion for nearly any family who loses a loved one in 2010. For example, if mom dies in 2010 when there is no federal estate tax, any stocks inherited by the beneficiaries of mom’s estate have a carryover basis (mom’s purchase price is the starting point for calculating the basis for the stock). In this scenario, mom bought the stock shares in 1963. Conceivably, there could be a tremendous amount of capital gains tax that the beneficiary will pay upon the sale of the stock. 

If mom had died in 2011 instead of 2010, her estate would have been subject to estate tax and the estate assets would have been entitled to a stepped-up basis (valued on the date of death). In that instance, it doesn’t matter when mom purchased the stock, the basis is essentially the current market value and the beneficiary of inherited stock shares pays little, if any, capital gains tax.

The situation gets confusing when mom died in 2010 and the inherited stock shares are SOLD in 2011. What is the basis of the stock shares sold? On January 1, 2011, by its own terms, EGTRRA never existed! Therefore, can the stocks have a carryover basis under EGTRRA if EGTRRA never existed? Or do the inherited stock shares get a stepped-up basis?

Current status of the estate tax repeal. There have been numerous Estate tax reform proposals in Congress over the summer. However, no legislation has yet been passed to resolve the above issues. Congress has adjourned until November 15, so any legislation that may be contemplated by year end must be passed very quickly when the session reconvenes. Professionals have speculated that a retroactive reinstatement of the estate tax to January 1, 2010, is looking more and more unlikely because of the constitutional issues that arise when so much time has passed with no action by our lawmakers.

New York has passed legislation (Assembly Bill 9857) that protects the beneficiaries of an estate for decedent’s dying in 2010 against some of the unintended consequences of the sunset provisions relating to tax basis and word formula clauses.

The IRS has created a form (copy not yet available) whereby an Executor of an estate can allocate a step-up in basis to estate assets ($1.3 million or $3 million to property inherited by a spouse).

What you should consider NOW, before year end. Proper estate tax planning is more critical now than ever before. There are many other issues too complicated to be explored in this article to be considered by the estate and trust tax professional. You may need to review your estate plan with an estate attorney or financial planner before year end and it is especially important that you include your accountant in those discussions.

Some Trustees may need to consider making additional distributions in 2010. Attorneys need to be especially mindful of the proper administration of estates for decedent’s dying in 2010 and beyond.


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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