ESTATE PLANNING “PURGATORY”: 2010 AND BEYOND

Let’s look at the impact of the estate tax “repeal” situation.  Clearly, confusion reigns.  Congress continues to be deadlocked on how to approach the estate tax situation.  However, there are three likely scenarios and results for the “repeal” situation.

            The three scenarios which every estate plan must address are:  (1) Congress acts, and passes a law that applies retroactively, (2) Congress acts, and the law does not apply retroactively (or retroactive application is found unconstitutional by the courts), and (3) Congress simply does not act!

            This means that the three most likely results are (1) the 2009 structure is extended.  This would result in a $3.5 Million exemption and a 45% estate tax rate; (2) a $5 Million exemption and a 35% estate tax rate would be in effect, or (3) the former $1 Million exemption with a top rate of 55% is reinstated.  In each case, estate plans must take into account the “gap” period (today’s “purgatory” situation where no estate tax is in effect while we “wait” to find out where we’re going!)

            Unless and until Congress acts, there will be no estate and generation skipping tax.  The gift tax is at 35% with a $1 Million lifetime exemption.  Finally, a new income tax system is installed to replace the revenue lost as a result of the estate tax repeal.  This system features a “carry-over basis” regime.  Under this system, there is no automatic death basis “step-up” as we’re used to.

            Under the 2010 system, estate planning document focus must shift to take into account a system that allows for a $1.3 Million step-up in basis allocation, and for married couples, properly addresses the opportunity to access an additional $3 Million step-up in basis allocation.  Documents must cover the current situation and also account for the potential reversion to the system used in the past.

            What can be done, proactively, about this confusion?  First, you should have your plan reviewed.  There are some situations that are more critical than others, but at least six situations can be improved by being proactive.

            First, any document prepared prior to 2001 would obviously not address issues raised by passage of the law in that year.  Everyone in that situation should have their plans reviewed.

            Second, anyone who dies this year is under the capital gains regime developed to “replace” the expiring estate tax.  If you or a loved one have health problems and are at higher risk of dying this year, you will need to determine the basis of your assets.

            Third, if you have developed a plan informally using the estate tax exemption amount to resolve differing distributions, you are at complete risk.  These plans would likely include blended families and charitably inclined people.  Those plans should be reviewed proactively.

            Fourth, all generation skipping plans should be reviewed so that you can be aware of the impact of the new planning landscape.

            Fifth, if you would be affected by a reduction back to a $1 Million exemption, your plan should be reviewed.

            Finally, documenting your planning intent is critical in changing times like these.  Doing nothing - because the estate tax has been “repealed” - is not recommended.