Wise Wealth Management

Dennis Covington | Principal

Insights on the keys to enjoying a "healthy wealth".

Trying to Clear Up the Confusion about Estate Tax Law

March 2010

The "repeal" and looming reinstatement of the estate tax, with its lower exemption amount and higher rates in 2011, is complex – so much so that I get the sense that many affluent individuals are putting their heads in the sand and hoping more definitive laws will be enacted soon. This, of course, is no strategy at all for what is a vitally important part of Comprehensive Wealth Management.

The question all high-net worth individuals should be asking is, "How does this affect me?" I've asked a member of our expert team, Laura Wartner, an estate-planning attorney with Smith, Gambrell and Russell, LLP, to provide some guidance on how to navigate through the current confusion over the estate tax laws.

I hope that you will take a moment to read her commentary below and review your estate planning documents. If questions arise, please contact me and I will be happy to assist you in getting expert counsel on this complex issue. 

By Laura L. Wartner
Smith Gambrell & Russell, LLP

Much has been written about the failure of Congress to address the scheduled “repeal” of the estate and generation-skipping transfer (“GST”) taxes before 2010, thereby wreaking havoc on professional estate planners and their clients. We need not repeat the details, but a summary of how this came about is important.

Under 2001 legislation, the exemption for federal estate and GST taxation increased to $3,500,000 in 2009 and will drop to $1,000,000 in 2011. Under that same legislation, the tax rate for estate and GST taxation decreased to 45% in 2009 and will increase to a 55% maximum rate in 2011. During 2010, the 2001 legislation effectively repealed both estate and GST taxation. Because of the obvious inequity and poor national policy, it was widely believed that Congress would address these issues in 2009, but it did not.

The change in gift tax law is only slightly less confusing. The 2001 legislation allowed an effective gift tax rate of 45% in 2009, 35% in 2010 and 55% in 2011, while providing for a lifetime exemption of $1,000,000.

To compensate in part for the repeal of estate and GST taxes in 2010, the 2001 legislation provided for a “carry-over basis,” with some adjustments. Little has been written about the carry-over basis provisions, but statistics show that for decedents dying in 2010, over 70,000 estates will be negatively affected by the carry-over basis rules, while about 6,000 estates would benefit from a repeal of estate or GST taxation.

As though this situation is not complicated enough, there are two additional legislative movements that may provide more confusion. First, Congress may consider legislation to reinstate estate and GST taxation in 2010, which may be retroactive to January 1, 2010. Whether the retroactivity of such legislation would be constitutional remains to be seen. As a result, at the present time, no one can tell whether estates of decedents dying in 2010 will be subject to estate tax or not.

In addition, Georgia and other states are considering legislation which would influence the interpretation of estate planning documents for decedents who die when no estate or GST taxation is in effect, by causing the estate planning documents to be interpreted as though the law in effect in 2009 still existed.

Estate planning has never been so entertaining. The question which seems to be most pertinent to our clients is: “How does this affect me?”

There is no single or simple answer to that question, but you should review your existing wills and trusts (“Estate Planning Documents”), keeping some guidelines in mind:

  1. If you are unmarried and your Estate Planning Documents leave specific bequests to children or other persons, either outright or in trust, in all probability your documents do not need to be revised.
  2. If you are unmarried and you leave bequests to persons utilizing GST planning, you should consult with your estate planning counsel to see whether changes in your documents are warranted. If, in the review of your documents, you see the phrase “GST Exemption” or “Family Dynasty Trust,” your documents would fall into this category.
  3. If you are married and your Estate Planning Documents leave all of your assets outright to your spouse, in all probability there is no need for any change.
  4. If you are in your first marriage and your Estate Planning Documents create a Family Trust (to be funded with the amount of your estate tax exemption) and a Marital Share, your documents may or may not need revisions. Most estate plans which are constructed in this manner utilize a formula. In the absence of estate tax law, some formulas would cause all of the assets to pass into the Family Trust; other formulas may cause none of the assets to pass into a Family Trust, or may be unclear. If all of your assets would pass to the Family Trust and your spouse is the primary beneficiary of this trust with your descendents as secondary beneficiaries, passing all of your assets into the Family Trust may work well. But there are many exceptions. If there is any doubt about what would happen, you should have your documents reviewed immediately.
  5. If you are in your first marriage and your Estate Planning Documents create a “Family Trust,” a “Family Dynasty Trust,” a “Generation-Skipping Trust,” or other language suggesting the use of GST planning, your documents should be reviewed, because the GST tax planning will, in all probability, not be effective.
  6. If you have children by a prior marriage, and your estate plan utilizes a “Family Trust” and a “Marital Share,” your documents should be reviewed immediately. It is possible that the formula would cause all of your assets to pass into the Family Trust, which may or may not include your spouse as a beneficiary.
  7. If your Estate Planning Documents include a trust to carry out charitable bequests, such as a Charitable Lead Trust or a Charitable Remainder Trust, you should have your documents reviewed immediately, as the formula amounts that are used to determine the value of property passing into these trusts may not produce the results you anticipate.
  8. If you are married and you own assets that have unrealized gain in excess of $1,300,000, you should review your situation carefully, as there are special new rules that allow a basis increase for certain assets passing to or in special types of trusts for the benefit of a surviving spouse, up to a maximum $3,000,000 basis adjustment. This special basis adjustment will be lost unless your estate planning documents are properly prepared.

There are several approaches to address these issues. One approach is to write provisions into your Estate Planning Documents which set out alternative provisions for your estate if death occurs when there is no applicable Federal estate or GST tax law in existence. Another approach is to add a provision that interprets your Estate Planning Documents as if the estate and generation-skipping laws that existed on December 31, 2009 are still applicable. It is important for you to contact your estate planning counsel to determine whether you need to do anything and what approach is best for you.

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