By Susan Shields
Everyone is probably aware that anytime there is a big event in the family — a death, a divorce, a new child or grandchild — wills, trusts and other estate planning documents should be reviewed to make sure they are still current. Also, it’s a good idea to review those documents every 3 to 5 years just to make sure no changes are needed. However, due
to changes in the estate tax laws in 2010, everyone (and particularly
those people with large estates) should take time to review their estate
planning documents in light of the uncertainty of the federal estate
tax laws. Massive changes occurred in the federal estate tax planning
arena as of January 1, 2010, including the following:
- There
is no federal estate tax
for decedents dying in 2010.
- There is no generation-skipping
transfer (GST) tax in 2010.
- The federal gift tax remains
effective with a maximum federal gift tax rate for 2010 of 35% (down
from 45% in 2009) and a continued $1 million lifetime exemption.
- Beneficiaries
who receive property from a decedent dying in 2010 will receive a
carryover basis in the property for income tax purposes (the same basis
as the decedent had at death), rather than a step-up in basis.
- The
Oklahoma estate tax was repealed beginning in 2010. This change is
separate and apart from the federal law changes.
It is
likely that Congress will pass legislation in 2010 to amend these rules,
and if that occurs, such changes may be made retroactive to January 1,
2010. However, if no legislation is passed in 2010, then beginning
January 1, 2011, the estate, gift, and GST exemptions and rates in
effect in 2001 will be reinstated. This means that there is a
possibility of a return to a $1 million federal estate and GST exemption
in 2011 and a 55% estate and gift tax rate.
If your current
estate plan provides for formula bequests to your spouse,
children/grandchildren or to charity, or if your documents leave the
“federal estate tax exempt amount” to certain persons or trusts, your
current plan may need immediate revision as a result of the 2010
changes. Many wills and trusts include formula clauses that divide an
estate between a “marital” share and a “credit shelter” or “exempt”
share. These formula clauses worked perfectly well in 2009 and prior
years, but may result in very unintended consequences in 2010 when there
is no estate tax. Such clauses could be construed to leave spouses with
far less than the creator of the estate plan intended, and in some
cases, even nothing.
Example: An individual has a $5 million estate. His will
leaves the “exempt amount” (stated as a formula) to his children from
his first marriage and the balance to his current spouse. Had he died in
2009, the children would have received $3.5 million and his spouse
would have gotten $1.5 million. The marital deduction coupled with
unified credit, which sheltered $3.5 million for 2009 transfers, would
have prevented any federal estate tax from being owed. Now assume he
dies in 2010. Read literally, the formula clause could be interpreted as
giving the full $5 million of assets to his children and nothing to his
spouse.
The future of the federal estate tax laws remains uncertain. Many
planners believe it is likely that legislation, when it is passed, will
result in a return to something akin to the 2009 rules, which provided
for a $3.5 million per person federal estate and GST tax exemption and a
tax rate of 45%. Some opportunity may exist this year for high net
worth clients to make GST gifts to grandchildren or to trusts without
the imposition of GST tax. Also, for people who have been considering
transfers by gift or sale to children or grandchildren, this could be an
opportune time to make those transfers. Of course, any planning
implemented at the present time should only be done after careful
consideration of the potential impact of a retroactive repeal and a
return to the higher gift tax rates and GST tax.
Susan
Shields is the leader of McAfee & Taft’s Tax & Family Wealth
practice group. She can be reached at susan.shields@mcafeetaft.com