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What’s become of estate planning?

June 11, 2010

While Congress has passed some major legislation this year, as of this writing it hasn’t passed estate tax legislation. So the 2010 estate and generation-skipping transfer (GST) tax repeal still stands. And both taxes are still scheduled to return in 2011 — at their pre–tax-cuts level of 55% and with exemptions significantly smaller than in 2009. This uncertainty creates tax hazards for some estate plans, and could even cause some people to unintentionally disinherit their spouse. So it’s important to check with one’s financial advisor for the latest developments.

All of this uncertainty may leave you asking, “What’s become of estate planning?”

2010: Potential dangers

On its face, the estate tax repeal may seem like a good thing. But if you die while there’s no estate tax, your estate plan may not operate as intended. Like many plans, yours may call for a marital trust (for the benefit of your spouse) and a family trust (for the benefit of your children or other loved ones). Furthermore, your plan may contain a formula that automatically allocates the amount that’s exempt from estate tax to the family trust with the balance going to the marital trust.

If there’s no estate tax, a formula like this may channel all your assets into the family trust — essentially disinheriting your spouse. What’s worse, you may create significant state estate tax liability, depending on how your state tax laws work.

The good news is that you can add an amendment to your estate plan that guards against this circumstance. Another danger is the change in the step-up in basis rules, which could cause your heirs to incur significant income tax liability if they inherit highly appreciated assets during the repeal.

2011: Coping strategies

Even if your estate plan escapes 2010 unscathed, you still have 2011 to contend with. As mentioned, sizable estate and GST taxes will return, but that’s not all: The gift tax also will increase to a top rate of 55% (from 35% in 2010).

In response, one move to consider is maximizing your annual exclusion gifts this year. The exclusion allows you to give up to $13,000 ($26,000 for married couples) to any number of recipients free of transfer taxes. And it likely won’t be affected by forthcoming legislation.

Also consider making taxable gifts while the tax rate is only 35% and making gifts to your grandchildren while there’s no GST tax in effect. But be aware that these moves could prove costly should Congress retroactively increase the gift tax rate and reinstate the GST tax.

Hard to say

Because it’s hard to say what will become of estate tax and its related provisions or when Congress might take action (it may even have done so by the time you’re reading this article), check with your tax advisor for the latest developments.

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