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Your Bank > Education and Advice > CNB University

Federal Estate Tax Update

As you may have heard, beginning on January 1, 2010 there is no federal estate tax for 2010. Due to the unprecedented nature of this situation, we wanted to provide you with an update on where this stands, what we might expect to occur and whether you should be taking any action.

Although the House did pass an estate tax reform bill on December 3, 2009, the Senate did not take any action before the end of 2009. As a result, according to the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), in 2010 we have a one-year repeal of the federal estate and generation-skipping transfer tax (GSTT). In 2011, these taxes will return to the structure and rates that existed back in 2001; a $1 million dollar estate and GSTT exemption with a top marginal rate of 55% on the estate tax and GSTT.

Some in Congress have indicated their desire to reinstate the estate tax as quickly as possible in 2010 and possibly to make it retroactive to the beginning of the year. If Congress were to retroactively impose the estate tax on those who died early in the year, one can only imagine the legal disagreements that could follow, adding delays and additional costs. If Congress does take action this year it is anybody’s guess what they will do. Those who follow this issue closely believe that Congress will simply extend the 2009 tax rules that allow for a $3.5 million estate & GSTT exemption with a top marginal tax rate of 45% for the estate and GSTT.

Several years ago, no one would have believed that Congress would let the federal estate tax rate go from 45% in 2009 to zero in 2010 and then back to 55% in 2011. But it is happening and the conclusion to this has yet to be written.

Below are few points to remember that are currently in place for 2010:

1) The federal estate tax and generation skipping transfer tax are repealed.

2) There are new rules governing “stepped-up-basis” on estate assets. These assets will be limited on the amount of the step-up to either $1.3 or $3 million depending on the situation.

3) The lifetime gift exemption remains at $1 million with a top tax rate reduced to 35%. (It was 45% in 2009)

Please note this does not affect any states that impose their own estate tax. New York, Maine and Massachusetts have their own estate tax structure with $1 million exemptions, while Florida continues to have no state estate tax.

As you can see, what we have for certain is confusion and changes that could have an effect on your existing estate planning. If you have incorporated family or tax planning ideas that are tied to application of federal or GST exemptions, I would recommend a review of your current estate planning documents and consult with your attorney or a Wealth Strategies Group Advisor.