2010 Estate Planning Alert
Changes in the law for 2010 could catch many people unprepared, resulting in higher tax bills and other undesirable consequences for the spouses and families of those who die in 2010 or later.
But you can take steps to adapt to the new rules. (Article continues below chart)
The information in this article is intended for general information and should not be relied upon as a substitute for legal advice. How the law applies to any particular person’s situation depends on the person’s exact facts and circumstances. Always seek the advice of competent legal counsel.
Internal Revenue Service regulations generally provide that, to avoid federal tax penalties, a taxpayer may rely only on formal written advice meeting specific requirements. Any tax advice in this article does not meet those requirements. Accordingly, any such advice cannot be used for the purpose of avoiding federal tax penalties or to promote, market or recommend any tax-related matters to others.
Why is there such uncertainty?
The problems arise from changes in federal tax law dating back to 2001, when Congress enacted a repeal of the federal estate law.
Under the new system, exemptions from estate tax rose steadily over the years, reaching a high of $3.5 million in 2009. For 2010, the estate tax is repealed entirely, but is scheduled to reappear in 2011 with an exemption of $1 million.
Capital gains tax rules changed too, eliminating the step-up in basis for appreciated assets.
Many observers believed that this confusing, bewildering system would surely be replaced with a more sensible system before 2010.
Guess what – Congress talked about changing it, but did nothing. They’re still talking. Proposals have included extending the 2009 rules for another year, fixing the exemption at $3.5 or $5 million dollars, and making whatever changes are enacted retroactive to the beginning of 2010.
Whether any of these changes will take place is anybody’s guess. In the meantime, uncertainty abounds.
Who is most affected?
You stand the greatest chance of having problems under the current system if you have:
- appreciated assets such as stock, mutual funds, or a second home
- net worth over $1.3 million (including life insurance), or
- a will that contains a credit shelter trust (also known as a bypass trust) or a marital (QTIP) trust
If you die this year holding appreciated assets, your heirs would pay much more in capital gains taxes than they would have under the previous rules. That’s because they would no longer receive a step-up in basis at the date of death. That means they have a larger amount subject to capital gains tax.
The capital gains tax change also means a record-keeping nightmare for many heirs, who will try to find records about what was paid for assets decades ago. If records can’t be found, the basis is presumed to be zero, and tax will be based on the entire value of the asset.
Those with larger net worth could be subject to federal estate tax if they die in 2011 or later, when the current law provides for an exemption of $1 million. If you consider the value of life insurance and retirement plans, which are counted as part of your estate, many who consider themselves middle class have estates of that size.
Even if your estate is much smaller, your family could have problems if you have a will that provides for a trust based upon a formula tied the federal estate tax law. For example, your will may provide that a certain amount of your estate will fund a trust that goes to your children, bypassing a surviving husband or wife. The rest goes into a trust for your spouse.
If the formula for the bypass trust is “the largest amount that will result in no federal estate tax,” that could be your entire estate. That formula may have made sense when the estate tax was $625,000, but now it could fail to provide for your spouse as you intended.
What should you do now?
The urgency for revising your will or the titling of your assets depends on what you own, how you own it, and – to put it bluntly – what the chances are of your death in 2010.
Anyone with millions in appreciated assets who is critically ill or in hospice in 2010 should seek the advice of an attorney experienced in estate planning. Someone in good health, with a more modest estate, wouldn’t have the same need for immediate action.
The test above should guide you in deciding how important it is to take immediate action. (Keep in mind, however, that it is always a good idea generally to have an up-to-date estate plan.)
