THE FEDERAL ESTATE, GIFT AND GENERATION SKIPPING TAXES: WHITHER GOEST THOU? Chicago Estate Planning Council February 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

RETROACTIVITY Constitutional considerations – Illinois case on constitutionality of retroactive enactment of decoupling statute – McGinley v. Madigan (1 st 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 Section 901(a) reads: “Sec 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: continued PL 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