Although there is no GST tax on lifetime transfers, such transfers are subject to a federal gift tax with a $1,000,000 lifetime exemption; this is in addition to the $13,000 annual exclusion. Further, the top federal gift tax rate has been reduced from 45% to 35%.

With respect to income tax, property of a decedent will no longer be entitled to a basis step up. Therefore, there will be a carryover of a decedent’s basis to the beneficiary. Such basis will be the lower of fair market value or the decedent’s basis. Accordingly, a subsequent sale of the decedent’s property may be subject to capital gains tax. There are some additional basis allocation rules that are beyond the scope of this Current Development.

There is currently significant discussion regarding whether or not Congress will act in 2010 to close the “repeal” gap and cause application of an estate tax to be retroactive to January 1, 2010. However, if no legislation is enacted in 2010, the estate tax and GST tax exemption amount will revert to $1,000,000 in 2011; the top gift, estate and GST tax rates will increase to 55%.

The 2010 repeal will likely only last a year, and proposed legislation suggests several estate tax planning techniques may be eliminated. Considering today’s low property values and interest rates, this is a great opportunity to effectuate an estate tax plan. We strongly recommend that you revisit your existing estate planning documents, and take action to prevent any unintended consequences in light of the current repeal of the estate tax.

(Updated January 2010)