The Unthinkable. At the date of this writing, it appears that Congress will adjourn before December 31, 2009 without any action to fix the estate tax. Almost no one in the estate planning profession would have dreamed that this would be possible.
To refresh your memory, the 2001 Bush Tax Bill reduced rates and increased the exemption so that in 2009 the exemption became $3.5 million per person with a fixed rate of 45% on the amount of the taxable estate in excess of that amount. For a married couple, thus a total of $7.0 million could be protected from the federal estate tax.
But apparently, the unthinkable has happened. Congress has not taken any action to delay, prevent or terminate the Sunset Provisions in current law. In other words, 2010 will bring a complete lapse of estate taxes and a return to the $1.0 million individual exemption in 2011.
Consequences. Remember that the gift tax is still effect. If nothing is done to restore the estate tax, persons dying in 2010 will have a completely different legal matrix applicable to their estate. The good news is that there will be no estate tax.
The bad news is that there will be what is called carry-over basis, which is intended to impose a capital gain tax on assets when they are sold, based on historical costs.
There are exemptions for carry over basis, in particular as to assets allocated to a spouse. The purpose of this newsletter is not to go into detail about the technicalities of this law. Congress tried carry over basis years ago and found it to be unworkable.
What About My Estate Plan? Most traditional Wills and Revocable Trusts have some division of the Trust at death, usually called an A/B Trust formula. The interpretation of these formulas, if someone dies in 2010 without an applicable estate tax, will be up in the air.
Without changes, it is probably that there will be a great many petitions to probate courts for interpretation of trusts which became irrevocable at death in 2010.
(We avoided this interpretation question in recent years where nuclear marriages were involved by providing for a single trust for the benefit of the surviving spouse, at the first death.)
Horns of a Dilemma. Clients are thus faced with a dilemma, modify older A/B Trusts formulas in existing Revocable Trusts, or wait to see if Congress reinstates the estate tax in early 2010.
Our recommendation would be to wait until the end of February to see if Congress takes action, retroactive or not. Clients with imminent health issues may wish to modify their A/B Trust provisions promptly in January, but otherwise we think it is prudent for clients to wait and see if Congress acts.
If Congress does not act in reasonable haste, then we would recommend clients with A/B Trust formulas in their trust documents set up appointments right away to make changes, which will eliminate ambiguities in the event of death in a period when there is no tax and carry over basis applies.
The dilemma can certainly be solved. The timing is an issue. Please call Jim Modrall, Tom Pezzetti if you wish to schedule an appointment to discuss this matter and the status of your current documents. Alternatively, contact any of the attorneys listed below.
Donald A. Brandt, Joseph C. Fisher, Thomas R. Alward, Matthew D. Vermetten, Susan Jill Rice, Gary D. Popovits, H. Douglas Shepherd, Laura E. Garneau, David H. Rowe and Nicole R. Graf at (231) 941-9660
©BRANDT, FISHER, ALWARD & PEZZETTI, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional advice.
