Be Sure to Review Your Estate Plan in Order to Ensure Consistency with Recent Estate Tax Changes

(Last Updated On: January 24, 2017)

You are doubtless aware that the failure of Congress to extend the federal estate tax and generation-skipping transfer tax system before January 1 of this year has created a great deal of uncertainty.

If Congress takes no action in 2010, there will be no estate or generation-skipping taxes for persons dying this year. Further, the estate and generation-skipping taxes is scheduled to return with a vengeance on January 1, 2011 with an exemption of $1 million (down from $3.5 million in 2009) and a maximum tax rate of 55% (as opposed to the former 45%).

The best guess of most practitioners is that Congress will act this year and attempt to reinstate the taxes retroactively to January 1, 2010, likely at the 2009 levels. The constitutionality of a retroactive tax change has been upheld in the past. Nevertheless, in an election year there is no assurance that Congress may not ultimately determine that any new estate tax law should have only prospective effect.

Further, if the law comes into effect in 2011 as currently written, not only will the exemption be reduced and the tax rate increased, but beneficiaries will no longer receive a “step-up” in basis of inherited property to fair market value, but will instead receive a “carry over” basis, that being the decedent’s basis. Of course, this is not so simple as it sounds, since the new regime would provide for an overall $1.3 million increase in the basis of assets and a special $3 million basis increase for assets left to a spouse. The specter of this loomed once before and an outcry from the planning community managed to shout it down, but the vagaries of the legislative process remain unpredictable.

There are many ramifications, but one feature for 2010 should be noted in particular. Many estate plans contain formula provisions tied to the exemption amount for federal and GST tax purposes. Often, the exemption amount (again, $3.5 million in 2009) goes into a “bypass” trust with the remainder being set aside, outright or in trust, for the surviving spouse. The bypass amount often provides for the surviving spouse as a permissible beneficiary, but this is not always the case, particularly in second marriages. Since the entire estate is exempt from estate taxes until further notice, the amounts passing to or for the benefit of a surviving spouse under a formula may be curtailed or nonexistent. As of the writing of this article, the Virginia legislature is considering a measure to have such clauses interpreted as if the law in effect in December 31, 2009 was now in effect. But even this may no longer be what a person had in mind if a will was executed when the exemption was $600,000. Accordingly, any wills or trusts that were created with estate tax considerations should be reviewed to see that they continue to carry out the individual’s wishes.

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