Do you need to update your estate plan?

published in McAfee & Taft AgLINC | March 1, 2010

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  • The Oklahoma estate tax was repealed beginning in 2010.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.

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