THE FEDERAL ESTATE, GIFT AND GENERATION SKIPPING TAXES:

WHITHER GOEST THOU?

Chicago Estate Planning CouncilFebruary 3, 2010

ESTATE, GIFT AND GENERATION -SKIPPING TAXES IN 2010

No federal estate tax – “suspension,” not repeal

No federal generation-skipping taxes Federal gift tax with $1mm exemption, 35%

rate Carry-over basis, with limited step-up

amounts allocable No Illinois estate tax No Illinois generation-skipping tax

HOW DID WE GET HERE, AND WHAT HAPPENS NEXT?

2001 Tax Act “Sunset” provision December, 2009 efforts to extend the estate

tax Senate failure to enact tax extender Inability of Democrats to reach consensus on

how to proceed A 2-year estate tax extension was excluded

from the recent “pay-go” bill Possible scenarios for 2010 - 2011

RETROACTIVITY

Constitutional considerations– Illinois case on constitutionality of retroactive

enactment of decoupling statute – McGinley v. Madigan (1st Dist., 2006) 366 Ill. App. 3d 974, 851 N.E. 2d 709

Political considerations Possible compromise solutions

– Partial retroactivity– Elect retroactivity

Impact on Current Estate Plans

Terms defined by reference to the Code Formula provisions – what do they mean?

– Marital formulae– GST exemption allocation– Other formula provisions

Distortions of client intent Potential for litigation either way Carry-over basis Advising clients

BACK TO THE FUTURE: 2011

PL 107-16 Section 901(a) reads:  “Sec. 901. Sunset of provisions of Act. “(a) In general. All provisions of, and

amendments made by, this Act shall not apply—

“(1) to taxable, plan, or limitation years beginning after December 31, 2010, or

“(2) in the case of title V, to estates of decedents dying, gifts made, or generation skipping transfers, after December 31, 2010.

BACK TO THE FUTURE: 2011- continued

PL 107-16 Section 901(b) reads: “(b) Application of certain laws. The Internal

Revenue Code of 1986 and the Employee Retirement Income Security Act of 1974 shall be applied and administered to years, estates, gifts, and transfers described in subsection (a) as if the provisions and amendments described in subsection (a) had never been enacted.”

Implications of “had never been enacted”

GST Trusts created in 2010 Distributions from non-exempt trusts Prior allocations of GST exemption in excess

of the 2011 exempt amount Treatment of prior taxable gifts under 2011

rate table Impact on 2010 decedent’s and carry-over

basis

Possible Planning Opportunities

Taking advantage of a 35% gift tax rate– Lifetime QTIP trusts– Formula gifts

Direct skip transfers Distributions from non-exempt trusts

Challenges With 2010 Decedent’s Estates

Creating a tax reserve Administering the carry-over basis rules

– Delay decisions on selling:– How to allocate basis step-up for assets sold

before funding?

Reporting and protective elections Delay distributions?

QUESTIONS