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Estate Tax Planning Update, March 2010

March 31, 2010

The Issue: As has been widely reported over the past several months, Congress allowed the federal estate tax and generation skipping transfer (GST) tax to lapse as of January 1, 2010. Estates, no matter how large, currently are not subject to federal estate or GST tax. Connecticut’s estate tax continues to apply, with an exemption that increased on January 1, 2010 from $2,000,000 to $3,500,000 per person, which was the federal estate tax exemption in 2009.

While this sounds like good news, the federal repeal is effective for 2010 only. Under current law, the federal estate and GST taxes are scheduled to return in 2011, with exemptions of just $1,000,000 and $1,120,000 respectively and with tax rates that reach 60%. Although most practitioners and observers believe that Congress will be compelled to reach a compromise before year end to avoid a return to these low exemption levels, no one really knows what Congress will do.

Adding to the confusion, the estate tax has been replaced for 2010 by a complicated income tax system based upon the concept of “carryover basis”. The mechanics of the system are beyond the scope of this update. In general, heirs and estates may incur capital gains taxes on the disposition of assets that appreciated in value during the decedent’s lifetime. The carryover basis rules will disappear in 2011 if the federal estate and GST tax are restored.

How it Affects You: Most estate plans created prior to 2010 were not designed based on the absence of a federal estate tax. Although many will continue to operate appropriately in 2010 and beyond, it is possible that your plan may require revision based on your objectives, personal circumstances, and the specific provisions of your estate plan. In particular, documents with provisions pegged to the federal estate or GST tax exemptions applicable at death should be reviewed and may require revision. If you would prefer to avoid legal expense that may prove to be unnecessary if the estate and gift tax laws are effective retroactively to January 1, 2010, you may wish to wait until the current situation is resolved. However, if you wish to be proactive, please contact us to evaluate your estate plan in light of your current assets, objectives and the changes discussed above, and to determine if revisions should be made.

What Hasn’t Changed: The federal lifetime gift tax exemption remains at $1,000,000 per person. Annual exclusion gifts of up to $13,000 per recipient continue to be permitted without reporting requirements and without utilizing your lifetime exemption. Married couples who elect to split gifts may give up to $26,000 per recipient using exclusions of both, although the election must be made by filing a gift tax return. You may continue to make gifts in the form of tuition payments made directly to qualifying educational institutions or medical payments made directly to health care providers without any reporting requirements and without impact on your gift tax exemption or dollar amount exclusion.

If you have any questions or would like to discuss how these rules may affect your current estate plan or changes you may be contemplating, please contact any member of our Estate Planning Practice Group.

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