Legal News

2010 Brings Temporary Estate-Tax-Free Period

By Brian Harris

In the week since the dawning of the (temporarily) estate-tax-free world, it has now been suggested that Congress will not try to re-enact the federal estate tax retroactive to the beginning of the year. There was considerable uncertainty expressed as to whether Congress could do such a thing.  If they did so, there would surely be litigation challenging such action, and that would have resulted in delay in settling estates.  The effect of leaving the estate tax in abeyance for a period of time, which might continue for the entire year, is that anyone dying during the period would have no estate tax assessed on his or her estate.  Of course, very few people have enough assets to be subject to the estate tax under the $3.5 million exemption in effect in 2009.  But the news for families of those who die during the lacuna period is not all good, because of the carryover basis problem.

If the assets of a decedent are not subject to estate tax, then the basis of those assets is not automatically stepped up to date of death value.  There's an exception to this rule, as there is to everything in the Internal Revenue Code. A certain amount of assets may be stepped, more if they pass to a surviving spouse.  But this requires additional work to determine which assets should be chosen for step-up.  And for those assets not stepped up, it will be necessary to keep records of the basis of the asset when it was owned by the decedent.  That could be difficult for assets acquired by the decedent many years earlier.  And it has the tax effect of subjecting those assets to capital gains tax upon sale that would have been avoided if all assets had been stepped up to date of death value.

But there's another wrinkle.  Many wills that were written based on the existence of the federal estate tax might not work as intended if there is no such tax in effect.  For example, many wills have been written in this way: Give my surviving spouse the smallest amount necessary to reduce the estate tax as low as possible and give the balance to a trust for my family.  When the tax was in effect, that meant that the exemption amount would go into the trust, and the balance would pass to the spouse, outright or in another trust.  But now, the amount that must pass to the trust to minimize estate taxes is zero, so nothing would be allocated to the spouse.  The spouse might benefit from the remaining trust, but only if the will is written so that the spouse might benefit from that trust, and not all wills are so written, particularly those where there is a second marriage.  So this change in the will might result in estate plans not working as intended, possibly leading to surviving spouse electing to take a statutory share in lieu of the will provisions.  And lawyers may be called to account if they haven't advised clients of the effect of the change in the law, and the possibility of amending wills to correct the problem.  Our firm has been contacted by our insurance carrier to advise us of our responsibilities toward clients as a result of the lapse in the tax.  So the failure to extend the tax has possible effects beyond the simple freedom from estate tax for those who die before the tax is re-imposed.

Full post as published by The Legal Intelligencer Blog on January 11, 2010 (boomark / email).