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Estate Tax Legislation UPDATE
No new estate tax legislation has been passed, and as you probably now know, there is currently NO ESTATE TAX for individuals dying in 2010. BUT, this is not as great as it sounds, because the 'stepped-up' basis rules have also been changed; there is no longer an automatic 'step-up' in basis for all assets received from a decedent. If you have estate planning documents, such as a will or a revocable living trust, you SHOULD have them reviewed by an estate planning attorney, to be sure that they will operate as intended now that the law has changed.
In addition to these massive changes for 2010, in 2011 (if Congress doesn't act) the estate tax will not only come back, but the exemption will be re-set to the $1 million level. Even if your estate is not near the $3.5 million taxable threshold that was in place in 2009, it could very well be taxable in 2011 and beyond.
So what is Congress likely to do about this? Now that we're more than halfway through the year, it is very unlikely that Congress will reinstate the estate tax retroactively for 2010, at least not in a mandatory way. One solution that has been suggested is to permit estates of those dying in 2010 to choose between the now-existing law (limited basis step-up and no estate tax) or a reinstated estate tax with full basis step-up. But the political situation has made it very difficult to get any estate planning legislation through Congress, and most experts believe that no such laws will be passed until after election day. (I put it at about 50/50 that the law will actually be changed before the end of the year.) But as 2011 looms, there will be increasing pressure to at least do something to raise the exemption above $1 million for 2011 and beyond.
If Congress does act, what is it likely to do? Well, on December 3, 2009 the House passed a bill extending the $3.5 million estate tax exemption (with no index for inflation) indefinitely. The Senate failed to act on that bill or to pass one of its own. Some Republican Senators have pushed for repeal of the estate tax. Most Democrats are strongly opposed to a repeal or even an increase in the exemption level. Most of the current proposals seem to allow for an exemption of $3.5 million, but as pressures increase to find funds for health insurance reform and other pressing concerns, it is certainly possible that a lower exemption may be considered. Any change for 2011 will be an increase in the exemption, and thus an "additional tax" that will have all the baggage associated with such proposals.
So all we can do is wait and see, and adjust our planning to provide the best results under any possible scenario - including one where the estate tax returns "with a vengeance" on January 1, 2011, for all estates over $1 million.
New HAWAII State Estate Tax
In what I can only think of as a 'stealth maneuver', at the end of April the Hawaii State Legislature passed a bill effectively reinstating a state 'death tax' for Hawaii residents dying on after April 30, 2010, with estates exceeding$3.5 million. I call it a "stealth maneuver" for two reasons. First, almost no one in the estate planning community knew about the bill before it was passed. And second, when one reads only the text of the bill itself, it seems to affect only non-citizen, non-resident decedents. But upon close inspection, it can be seen that the bill also changes certain definitions that are used in other parts of the law, which are not repeated in the new bill - but are already existing in the affected statutes, and will 'spring back' into action because of the definition changes.
By changing the definitions, the law effectively reinstates a Hawaii estate tax equal to the amount of the Federal 'state death tax credit' as that credit was calculated before it was eliminated. (Before the credit was eliminated from the Federal tax code, Hawaii imposed a 'pick up tax' - essentially taking a tax equal to the credit that an estate received under Federal law. So there was no real effect of the Hawaii tax, except to shift funds from Federal to State coffers. An estate would pay a tax to Hawaii, and get an equal credit against its Federal tax.) Now that there is no longer a Federal credit, though, the re-imposition of a state tax (equal to what the credit would have been, in the last year that it was allowed) does constitute an actual, additional burden on those with larger estates.
For more information on the impact of these changes, contact a Hawaii estate planning attorney today.