In the Twilight of the EGTRRA

How to adapt your clients' estate plans to legislative uncertainty in 2010.

February 8 , 2010
by Daniel Rubin/Journal of Accountancy

When the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA, PL 107-16) was enacted in 2001, almost no one seriously thought that one of its most important provisions would ever be given its full effect — the repeal of the federal estate and generation-skipping transfer (GST) taxes in 2010. However, as of January 1, the federal estate and GST taxes are indeed no more. Unless Congress reinstates them sooner, they will remain repealed until January 1, 2011, when, because of the sunset of the EGTRRA, they are scheduled to be reinstated — with a $1 million exemption and with a top rate of 55 percent, plus a five-percent estate-tax surcharge on portions of estates exceeding $10 million.

The EGTRRA also changed the basis treatment of property acquired from a decedent after Dec. 31, 2009. Under IRC § 1022, the basis of most property acquired from a decedent is now the lesser of fair market value or the decedent’s “carried over” adjusted cost basis, instead of, as under prior law, a basis that is “stepped up” to fair market value as of the date of death.
What the EGTRRA did not do, however, was repeal the federal gift tax. Indeed, it remains in 2010, with the same $1 million exemption as in 2001 but with one significant difference from 2009: The tax rate is reduced from 45 percent to 35 percent. And, although the exemption is scheduled to remain at $1 million indefinitely, following the scheduled sunset of the EGTRRA on Dec. 31, 2010, the tax rate will return to where it was pre-EGTRRA, 55 percent.

In the meantime, tax and estate advisers have to consider what to recommend to their clients. While the fluidity of the situation renders specific recommendations vulnerable to becoming quickly outdated or moot, here are some points to consider:

Review Wills and Revocable Living Trust Agreements

The customary division of the estate of the first spouse to die into a credit shelter trust and a marital share is almost always defined by a formula that passes the deceased spouse’s remaining estate tax exemption ($3.5 million in 2009) into the credit shelter trust and any remaining estate either outright to the surviving spouse or to a qualified terminable interest property (QTIP) trust for the exclusive benefit of the surviving spouse (see Estate Planning: Time for a Tune-up). A common version of this formula might provide that the amount passing to the surviving spouse is “the minimum amount necessary as the federal estate tax marital deduction in the decedent’s estate to reduce the federal estate tax due to the lowest possible amount.” Other versions of this formula might instead define the amount passing to the credit shelter trust as, for example, “an amount equal to the applicable exemption amount within the meaning of the Internal Revenue Code” or “that amount which will generate the largest taxable estate for federal estate tax purposes without the estate paying any federal estate tax.”

This article has been excerpted from the Journal of Accountancy. View the full article here.