Spring 2010 issue of Horizons

value of the estate was under the exemption amount. Over the next decade, we would hope that the estate and gift tax laws would be fully unified. 4. Portability: Many estate tax reform proposals contain a provision known as “portability.” Portability allows a surviving spouse to use his or her deceased spouse’s unused exemption, meaning that a husband and wife can leave a total of $7 million to the next generation estate tax-free, no matter how their assets are held or titled ($3.5 million per spouse under 2009 law). Portability removes the unfairness of penalizing some families for not planning in advance or not dividing up their assets appropriately. It is hoped that before the end of the next decade, some form of portability will be enacted into law. 5. Basis Step-Up: Under 2009 law, assets that an individual owns at death are entitled to receive a basis step-up. When the estate tax is scheduled to be repealed in 2010, the step-up in basis rules are replaced with modified carryover basis rules. Since we are predicting that the estate tax will not be repealed, we will predict that the step-up in basis rules will remain the same.

2. Estate Tax Rates: In 2001, the highest estate tax rate was 55 percent. In 2009, the highest rate was 45 percent. Some tax bills would settle the highest rate in at 45 percent. Other bills would increase the rate to 50 percent or 55 percent for larger estates. Another option that has been floated around Washington is tying the estate tax rate to a two- tiered rate based on the capital gains rate. For example, for taxable estates under $25 million, the estate tax rate would be the capital gains rate, and if an estate exceeds $25 million, that excess would be taxed at two times the capital gains rate. For purposes of predicting where the federal estate tax rate will end up over the next decade, the best guess we can make is a high rate of 45 percent. Although the federal estate tax rate has certainly been higher in the past, it is a little unsettling and maybe politically unwise to pass a law where the top rate takes half or more than half of a taxpayer’s assets. Further, although there is some logic to tying the estate tax rate to the capital gains rate, given the uncertainty of where the capital gains rate will be in the future, it may not make sense to tie the two rates together. 3. Unification of Estate and Gift Tax Laws: Currently the federal estate and gift tax laws are only partially unified. One area in which the law remains disparate is the ability for a taxpayer to use his or her exemption amount during life and at death. Under current law, a taxpayer has a $3.5 million exemption at death. The taxpayer is allowed to use up to $1 million of that exemption by gifting during life. Amounts gifted in excess of $1 million are subject to a gift tax even though if those assets were owned at death they would not be subject to either a gift or estate tax if the

Questions? Contact:

Rich Petrofsky, JD, LLM Partner Wealth Management Services Group 314.290.3487 richard.petrofsky@rubinbrown.com

19 u spring 2010 issue