The 2010 Estate Tax Loophole: Good News Bad News


The federal estate tax does not exist in 2010.  Ordinarily, upon death an estate tax can be imposed on the transfer of assets from a decedent to anyone other than a spouse or charity.  Until 2010, there had been an exemption amount in the law which excused estates from having to pay a tax if the assets were below a certain threshold.   If the tax applied, the tax rate was substantial with larger estates possibly losing some 50% to the government.  

So, what happened?  As part of President Bush’s 2001 tax cuts, the estate tax was phased out gradually over ten years with total repeal occurring in 2010.  Maryland still imposes its own estate tax for estates greater than $1M.

In response to the repeal, the Maryland legislature enacted emergency legislation in April to fix a problem that loomed because of the repeal.  Many wills written for individuals prior to 2010 contained provisions that referred to, or depended on, the federal estate tax regime for computing the amount of distributions to certain heirs.  By referring to “an exemption amount” that didn’t exist in 2010, many decedent’s intentions under their will would be thwarted because the formula employed would be thrown out of whack. 

For 2010, any provisions in a Maryland will or trust that refer to the federal estate tax or generation-skipping tax laws will be interpreted using those terms as they existed under the law on December 31, 2009. 


The repeal of the federal estate tax will be very short lived; it returns in 2011.  What’s worse, when it returns, it will be much more onerous than it was for the preceding nine years.  The exemption amount, that had been as high as $3.5M per person, will roll back to a meager $1M per person in 2011, unless Congress acts soon.  There were not enough votes in Congress in 2010 to make the repeal permanent.  So for 2011, the estate tax laws are reinstated and the exemption amount is rolled back to the 2001 level. 

For those wealthy individuals dying in 2010, such as George Steinbrenner (owner of the New York Yankees) the repeal of the federal estate tax does not mean the family will totally escape any and all taxes.  A whopping income tax looms for the family if they inherited assets that had appreciated in value in the hands of the decedent.  What Congress giveth with one hand – the repeal of estate tax, they taketh away with the other –  the repeal of the “step up in basis”.  One of the most beneficial tax breaks in the income tax laws allows heirs to ignore the appreciation in value of assets held by a decedent upon their receiving them at death. 

What should you do? 
Have your estate plan reviewed immediately and stay tuned to the news for changes that are likely to follow with the federal estate tax laws.