Notice To Our Estate Planning Clients
RE: The 2010-11 Estate Tax Debacle

Mette, Evans & Woodside takes pride in keeping its clients aware of any significant changes in the law that may impact their affairs. In this regard, we wanted to share with you news of the unanticipated repeal of the federal estate tax at the end of 2009 which has caused quite a stir. In fact, there are many people who have called it a "debacle."

We have provided a summary (see below) of the new estate law which, among other things, shows you the differences between the federal estate and gift law in 2009 and what is now in place in 2010 and what is planned to come into effect in 2011. Please note that the 2011 changes shown on the chart below are already in the law and will take effect without Congress taking any further action whatsoever.

Unfortunately, Congress and the President continually stated last year right up to Christmas Eve that the 2009 federal estate tax rules would remain in effect for 2010 and beyond until further tax changes could be considered and implemented. Congress simply did not act. Actually the House of Representatives did pass a bill which would have extended the 2009 tax structure; however, the Senate never concurred and the bill could not be passed on to the President.

Assurances were made at the end of the year that as soon as the Senate reconvened on January 20, 2010, the matter would be resolved. This has not happened. As a matter of fact, we are now being told that there is no scheduled date when the House and Senate will address this matter again; however, the indications are that Congress will do something before the end of 2010. There is some belief that whatever action they do take whenever they take it will be retroactive to January 1, 2010, even though the action may not be taken until months from now.

Please note that our firm has serious misgivings about the prospect of a federal estate tax being made retroactive to January 1, 2010. There are a number of U.S. Supreme Court decisions which can be construed against such a result and common sense leads us to believe that such a result may not come to pass.

Details of the recent Estate Tax changes for 2010 and 2011, which were recently adopted by Congress include:

• The Federal Estate Tax has been repealed for the year 2010 (so far).
• The Federal Estate Tax will be back in 2011 with a vengeance where the applicable credit amount will be only $1 million and the maximum tax rate will be 55%.
• The Gift Tax has been retained for any gifts in excess of $1,000,000 but the maximum rate has been reduced to 35% for 2010.
• Gift Tax in 2011 will have an applicable credit of $1 million but a tax rate of 55%.
• The generation skipping tax (GST) has been repealed for 2010 - this means that gifts to "skip persons" in 2010 can be made for only a 35% gift tax if the amount of the gift exceeds the $1,000,000 available credit.
• Carryover basis rules are now applicable and there is only a limited allowable step-up in basis in 2010 and beyond.
  • There are 2 modifications to the carryover basis rule - the Executor can increase the basis up to $1.3 million for gifts to non-spouses and an additional $3 million for gifts to surviving spouses.
  • It is possible to make a gift to a surviving spouse of as much as $4.3 million with a step-up basis. See attached illustrations.
  • Please note you cannot adjust the basis upward above the fair market value on the date of death. In fact, if the date of death fair market value is lower than the basis, the date of death value must be used.