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Saturday, January 30, 2010


I had the pleasure of attending and speaking at the 2010 University Of Miami Heckerling Institute on Estate Planning in Orlando this past week. A lot of the focus was on the inapplicability of federal estate taxes in 2010, and the return of those taxes in 2011 at the rates and credits applicable in 2001.

Two interesting questions were raised relating to the return of the 2001 tax rates and credits - questions for which no one had a good answer. These questions arise from a curious provision of the 2001 tax act. This tax act provided for increased unified credit and generation skipping tax exemptions through 2009, and the nonapplicability of the estate tax and limited basis step ups at death in 2010. What the act provided is that starting on January 1, 2011, the changes made by the 2001 tax act shall be applied as if they "have never been enacted."

Let's take a look at the increased generation skipping tax exemption that occurred under the 2001 tax act. Assume we have a trust that was funded in 2009 by a grantor with $3.5 million. The grantor used his $3.5 million generation skipping tax exemption for the transfer, so that the trust now has a zero inclusion ratio and is fully exempt from generation skipping taxes in the future. On January 1, 2011, the generation skipping tax exemption shall be reduced to $1 million (plus inflation adjustments) per the revocation of the increases in the exemption that occurred under the 2001 tax act. Since the increases in the exemption are to be treated as if they "had never been enacted" does the trust we are talking about still having zero inclusion ratio since the $3.5 million transfer exceeded the $1 million exemption available in 2001 and again in 2011? If the increases in the exemption were "never enacted" then how can they have been used to create trusts that are wholly exempt?

A similar question arises in regard to the carryover basis regime that is applicable to persons that die in 2010. For such persons, the usual rule for adjusting the basis of all assets of the decedent to their fair market values on the date of death (or the alternate valuation date) do not apply. So let us assume we have a decedent that died in 2010, owned an asset worth $10 million, had a tax basis of $1 million, and the decedent's estate allocated the limited basis step up available in 2010 to other assets. If the decedent's estate or heirs sell that asset for $10 million there will be $9 million of gain. However, in 2011 we treat the 2010 carryover basis regime as having "never been enacted." Does this mean that if the asset is sold in 2011 the sellers can use the fair market value at death basis adjustments to bring the basis to $10 million (since those would be the basis adjustment rules applicable if the 2001 tax act amendments and "never been enacted?"

The answers to these questions will have to await Congressional action, court decisions, or possibly IRS attention. Of course, any conclusions drawn solely by the IRS in a manner adverse to taxpayers are open to challenge in court based on the language of the statute.

By the way, if anyone would like a copy of my materials for my Heckerling presentation (on the subject of tax consequences of settling litigation involving QTIP trusts), click the link below or go to

Charles Rubin’s Heckerling Institute Materials

1 comment:

Alexander said...

Good post very interesting