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Federal Estate Tax

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Congress did not act before year-end, resulting in some major changes to the federal estate, gift and generation-skipping taxes in 2010.  This year the federal estate tax rate is zero, meaning estates of any size will pay no federal estate tax.  Furthermore, rules for stepped-up cost basis have significantly changed and may result in a limited step-up in basis for larger estates.  The generation-skipping tax has also dropped to zero. The gift tax rate has been reduced from 45% to 35%; however, the lifetime gift tax exclusion remains at $1M.  The annual gift exclusion amount remains unchanged at $13,000. Any gifts over this amount would require you to file a gift tax return.

If no further legislation is passed, the estate tax comes back in 2011 at a higher rate, and with a significantly lower exclusion amount than those in 2009. The maximum 2011 tax rate will be 55% (45% in 2009) and the exclusion amount will only be $1M ($3.5M in 2009).  The generation-skipping tax will also return, and gifts will be taxed at the highest estate tax rate.

It is unclear how Congress will address any of these taxes, and whether or not they will make revisions. There is a possibility that revisions made mid-year could be retroactive to the beginning of 2010. We will continue to monitor congressional talks, and will keep you informed as developments occur. At some point, a review of your estate plan may be necessary. If you have immediate questions or concerns we recommend you contact your estate planning attorney. Of course, you can also contact us with questions.