Estate Tax Repeal is Real in 2010?

Estate Tax Repeal Is Effective Jan. 1,
2010

Is this real? What does it mean to you? To
your heirs? Your clients?

• Congress’ shocking inaction on the
  estate tax leaves every taxpayer in limbo. No federal estate tax exists
  effective January 1, 2010, but a complex new set of rules takes over. How
  do these rules affect you and your planning? Will these rules be changed?
  When? How?
• Almost every (perhaps every) tax expert believes
  Congress will reinstate the estate tax. Most believe a temporary
  continuation of the 2009 rules ($3.5 million federal estate tax exclusion
  and 45% rate) will be passed. But will they in fact do so? What do you do,
  if anything, in the interim?
• Will Congress make the reinstatement retroactive to
  January 1, 2010? Can they? Are there legal impediments to doing so? What
  happens if they don’t make it retroactive?

√ How is your will impacted by estate tax
repeal? Most wills and revocable trusts have formula clauses based on prior law
estate tax exclusions. How does this affect those who inherit from your estate?
It may not be just a tax issue. It could dramatically impact the division of
assets.

Example

• Your will was written when the estate tax exclusion
  was $600,000 and bequeathed the largest amount that would not trigger a
  federal estate tax to your children from a prior marriage. The balance,
  which was the bulk of your estate, was to pass to your new spouse.
• How will this phrase be interpreted if there is no
  estate tax?
• Does your entire estate pass to your children and
  nothing to your surviving spouse?

√ Is your estate plan viable in light of 2010 changes? You
should consult with your current attorney, estate planner, tax adviser,
insurance consultant, CPA and financial planner, to determine what, if
anything, you should do.

Professional Advisers

• Advisers should consider reaching out to clients, and
  perhaps former clients, and informing them of the magnitude of the issues
  and encourage them to address planning.
• CPAs should consider the rules governing the use of
  tax return information Treas. Reg. 301.7216, attorneys should consider
  rules governing attorney advertising. Other considerations might
  apply.

√Estate tax repeal is effective 1/1/2010.
Should you plan or is this just a tempest in a teapot? If you immediately
revise all of your estate planning documents to conform to the estate tax
repeal landscape, and then Congress reinstates the estate tax, will you have to
revise all your planning and documents yet again? Is it worth the effort and
cost to revise your documents to endeavor to anticipate all the following
scenarios?

• Repeal stays effective for 2010 and thereafter.
• Repeal stays effective for 2010 and, thereafter, the
  laws presently scheduled to take effect in 2011 actually do ($1 million
  exclusion and 55% tax rate).
• Repeal stays effective for a short initial portion of
  2010, but then Congress reinstates the estate tax using the 2009 rules of a
  $3.5 million exclusion and 45% rate pending further Congressional
  action.
• The estate tax is reinstated retroactive to January
  1, 2010, using the 2009 rules.

√ New complex carry over basis rules will
determine gain on the sale of inherited assets. If these rules remain law,
every will and revocable living trust should be revised to address them.
Executors and trustees will need powers and directions to allocate the new
basis adjustments permitted. The gift tax is not repealed and remains at a 35%
rate.

√While advisers all hope Congress patches
the law quickly and retroactively, does the period from 1/1/2010 to the
effective date of new legislation present a planning opportunity or an estate
planning disaster waiting to happen?

√The January issue of Practical Planner
newsletter will provide an analysis of the implications and planning
options.