Estate Tax Repeal

By Professor Jeffrey Sherman

As you probably heard, Congress failed to act to prevent the scheduled one-year repeal of the federal estate tax.  I'm flabbergasted that Congress allowed this to happen, since quite a large number of simple, noncontrovertial temporary fixes were on the table, but it has indeed happened.  Consequently, no estate tax will be imposed on the estates of individuals who die in 2010.  On January 1, 2011 (again, unless Congress acts), the pre-2001 estate tax will bounce back into existence, with the old (higher) rates and the old (lower) exemptions.
 
The generation-skipping transfer tax will likewise disappear for 2010 and then reappear on January 1, 2011, although the mechanics of this temporary disappearance are more complicated than they are for the estate tax.
 
The federal gift tax will continue throughout 2010, but in slightly altered form.

Another "temporary" rule for 2010 is so-called carryover basis.  Until now, a person who inherited property took as his basis the value the property had at the date of the decedent's death (that's an oversimplification, but it'll do).  In 2010, however, such a person would take the decedent's basis as his own basis.  For example, suppose Smith buys some XYZ stock for $50,000.  On Smith's death, his XYZ stock is worth $80,000, and Smith bequeaths the XYZ stock to Smith's child.  Some time later, Smith's child sells the XYZ stock for $90,000.  Under the old rules, the child's basis in the stock would have been $80,000 (the value as of the date of Smith's death), so the child would have had to recognize a capital gain of only $10,000 for income tax purposes.  Under this new 2010 law, the child's basis will be Smith's basis — $50,000 — so the child would have to recognize a capital gain of $40,000.
 
Members of Congress are already talking about acting early in 2010 to retroactively impose the estate tax (and presumably to retroactively cancel the new carryover basis rule) effective January 1, 2010.  The constitutionality of such a retroactive solution is certain to be litigated if Congress tries it.