Tips for Dealing with the Current Estate Tax
An excerpt from the beginning of the article is below:
When Congress passed the 2001 tax act, few expected the provisions repealing the federal estate tax and generation-skipping transfer (GST) tax in 2010 to take effect. Yet it has indeed happened.
With Congress unable to reach a consensus for even a one-year continuation of existing law, the provisions of the 2001 Economic Growth and Tax Relief Reconciliation Act have suspended the application of the federal estate and GST taxes for this year.
Without legislation, the federal estate, gift and GST taxes revert to 2001 law next year, with substantially higher rates and lower exemptions. The uncertain state of the transfer tax laws creates some tax planning opportunities, but many more pitfalls and uncertainties. Retroactive reinstatement is a possibility, although likely to engender constitutional challenges that will take years to resolve. How do these uncertainties affect most estate plans?
Many estate planners are seeking to take maximum advantage of the available tax exemptions, such as the estate tax exclusion and the GST exemption (each of which were $3.5 million in 2009), by using formula language in estate planning documents tied to technical tax terminology. The use of formula language allows the estate plan of married clients to automatically adjust the share of the estate that passes to family members, other than the spouse, without incurring estate tax. It accomplishes this by expressing the amount in terms of “the maximum amount that can pass without estate tax” or “the amount equal to the estate tax exemption in effect at my death.”
But these formulas have uncertain consequences when the tax or exemption referred to in the document is not in effect. What is the maximum amount that can pass without incurring tax under today’s conditions? Perhaps it is the entire estate. On the other hand, the maximum amount sheltered by the exemption might be zero when the estate tax exemption is no longer in effect. Depending on the formula used and its possible construction, an estate plan could have the opposite results of what was intended when current law is considered.
Special thanks to Jim Hillhouse (Wealth Counsel) for bringing this to my attention.