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Congressional Inaction Creates Estate Planning Mess

By failing to act before December 31, 2009, the US Congress may have created a 2010 mess out of the vast majority of the Wills and Living Trusts that are currently in existence.

What happened?
Congress did not act. As a result of legislation passed in 2001, the US Estate Tax has been “repealed” for individuals passing away after December 31, 2009 and before January 1, 2011. For one year, there is no Federal Estate Tax or Generation Skipping Tax. The Gift Tax remains in place with a top tax rate of 35%. If someone dies in 2010, “Carryover Basis” will apply with limited exceptions and expose heirs to future capital gains taxes.

Everyone expects Congress to act and retroactively reinstate the tax for 2010, but the reality is that Congress cannot agree on much of anything lately. The Democrats used favors to get the Health Care Bill through the Senate before the holidays and Congress still has a lot of work to do before the Bill can get to the President’s desk for a signature. As a result, it could be months before Congress acts. The longer they delay and the closer they get to the mid-term Congressional elections in November 2010, the harder it will be to get the votes necessary to reinstate the Estate Tax.

So what? Congress doesn’t act in 2010, shouldn't that be great news?
It is possible that some unmarried persons with large estates could escape estate taxation if Congress does not act to retroactively reinstate the tax, but we will not know that answer until December 31, 2010.

What is the biggest risk?
The biggest risk falls on married individuals, if one of them passes away in 2010. 99% of the Wills and Revocable Living Trusts that have been written over the past 20 years contain language that divides the assets of the first spouse to die based upon the “best” tax result. Those documents provide for the creation a Family Trust (or “B” Trust) at the first death and direct the executor or trustee to fill the Family Trust with the maximum amount possible to pay no estate tax, and then leave the balance of the assets in trust for the surviving spouse. In 2010, the amount that would be used to fill the Family Trust would be 100% of the assets after expenses. The amount for the spouse would be zero.

Individuals who are in a second (or third) marriage with children from earlier marriages are also at risk. In most second or third marriages, the Family Trust excludes the current spouse from receiving any income or principal from the Family Trust. Everyone assumes that the current spouse would receive assets through a Q-TIP Marital Trust. If there is no estate tax, then there is nothing that would be allocated to a “Q-TIP Marital Deduction Trust” for the current spouse. The current spouse could be left short.

What is the answer?
Contact your estate planning team or speak with your Blackman Kallick representative. We can have someone review your documents to determine your exposure and estimate the cost to correct your documents to assure that your wishes are followed. Due to the strong possibility of retroactive legislation, the revision of documents should only be undertaken in limited situations.
 

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.