by Francis Burton Doyle, Esq., WealthPLAN
After over a year of rampant speculation, Congress has failed to correct the flawed estate tax system. Experts nationwide found this inaction impossible to predict. The estate planning community is just now coming to terms with the resulting “chaos,” and we have been working to determine how best to advise our clients. The consensus among estate planners is that Congress will do nothing this year to alter the current law.
Effective January 2, 2010, the federal estate tax and generation-skipping transfer tax have been repealed. This repeal is effective only for the year 2010. Under current law, on January 1, 2011, the estate tax will be reinstated; however, the exemption amount will be only $1 million per taxpayer, and not the $3.5 million, which existed in 2009. In addition, for calendar year 2010, carryover basis has replaced step-up in basis, so that subject to a $1.3 million basis adjustment, beneficiaries of a decedent’s estate inherit property at the decedent’s basis for capital gains purposes. Lifetime gifting limits remain at $1 million, and the gift tax rate I reduced from 45% to 35%, which is a comparatively low rate.
The current and future tax laws create an unanticipated and highly volatile planning environment. Documents must cover the current situation and also account for the potential reversion to the system used in the past. Consider the following points when working with your current and future clients.
1) For calendar year 2010, married couples whose plans include marital/exemption trust formulas referencing the federal estate tax should be reviewed. In many cases, it will be advisable for clients to execute a “patch” amendment to clarify how the marital and exemption trusts are to be funded in the absence of an estate tax.
2) Because there is no generation-skipping tax in 2010, you may want to consider the possibility of advising your clients to use their $1,000,000 lifetime exemption by making gifts to grandchildren. While most practitioners generally do not recommend planning which results in a current gift tax, the reduced rate may prompt some families to consider making larger gifts at this time. Gifts could, of course, be made either outright to the beneficiary, or to a protective trust for the benefit of the beneficiary.
3) Remember, if the federal estate tax returns in January 2011 with $1 million exemptions, then married couples whose estates exceed $2 million would need to review their estate plans as well at that time
4) Regardless of the uncertainty with the current transfer tax system, there may be other issues to discuss with your clients such as updating trusteeship, the use of continuing trusts for asset protection purposes, business succession planning and advanced planning opportunities.
Estate Planning, Probate and Trusts involve complex areas of law. Individual circumstances must be considered before any advice can be given. The general information above is not to be construed as legal advice, which can only be given after consideration of the unique facts of each matter. Please seek the advice or counsel of your attorney, financial advisor or CPA, as it may be appropriate.
IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication was not intended or written to be used, and cannot be used, for the purpose of (1) avoiding tax-related penalties under federal, state or local tax law or (ii) promoting marketing or recommending to another party any transaction or matter addressed herein.
Francis Burton Doyle, Esq., is the founder of WealthPLAN, with over 30 years of experience in Tax, Estate-Planning Probate, Trust Administration and Litigation. He is Certified Legal Specialist, Taxation Law and Probate, Estate Planning and Trust Law (California State Bar). Frank is the Past President of both the Santa Clara County Estate Planning Council & the Silicon Valley Planned Giving Committee. Frank is also the Past Chair of the Planning Committee, Annual Jerry A. Kasner Symposium, Santa Clara University, School of Law. Mr. Doyle provides all the course development and instruction for the Advanced Legal Training Institute.
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