Senior Magazine

By: Craig Watson, for SENIOR Magazine (Texoma edition)

Back in 2001, Congress passed the Economic Growth and Tax Relief Reconciliation Act of 2001 (the Act). Among other things, the Act provided for the repeal of the Federal Estate Tax, but only for the year of 2010. For many reasons, both political and practical, it was widely thought that Congress would act before the end of 2009 to reinstate the Estate Tax.

Indeed, the House voted to reinstate the estate tax and a companion bill has even been introduced in the Senate, but Congress is now so paralyzed and dysfunctional that nothing has been finalized. We are left with an estate planning mess, created by Congress, which could lead to unintended consequences in the estate plans of some people who pass away this year. Many people think that Congress becomes less and less likely to clean up the mess as the fall elections approach.

Congress’ continued inaction has placed us on an estate tax roller coaster that will result in dramatically different treatment of otherwise similar estates depending on whether the decedent died in 2009, 2010 or 2011. In 2009, the estate tax exemption amount had risen to $3.5 million, meaning most persons dying in 2009 with an estate valued at less than $3.5 million would have no estate tax liability.

In 2010, the estate tax has been repealed so even the extremely wealthy who pass away this year will not have to pay estate tax. But the law is sun setted, meaning that the repeal expires at the end of this year. In 2011, the estate tax is scheduled to return with an exemption amount of only $1 million, which will once again subject many people to the estate tax. In 2011, the maximum estate tax rate increases to 55%, meaning estate tax planning becomes even more important.

Before 2010, many attorneys prepared wills and revocable trusts under the assumption that the federal estate tax would always be in effect. Wills and trusts prepared under this assumption may not work as intended if the owner dies in 2010. For example, many wills and revocable trusts create marital and family trusts (sometimes referred to as A-B trusts or A, B, M trusts). Upon the death of the first spouse to die, a formula allocates an amount equal to the estate tax exemption to the family trust and the balance of the deceased spouse’s estate to the marital trust. The marital trust is for the sole benefit of the surviving spouse during the spouse’s remaining lifetime with the assets remaining in this trust passing to the children at the death of the second spouse.

The family trust in this type of plan is often created for the benefit of children or other descendants. If death occurs in 2010, this plan could be interpreted to mean that the entire estate is to be allocated to the family trust. If the surviving spouse from a second marriage is not a beneficiary of the family trust, the surviving spouse could be unintentionally disinherited. Trusts similar to the marital trust that were to be created under this type of plan for a charity or grandchildren may not be created due to the effect of the new estate tax law. These are only a few examples of provisions that could create significant problems if death were to occur in 2010.

It is strongly recommended that every estate plan be reviewed to analyze the impact of the new tax law on the estate plan. Therefore, if your estate plan included estate tax planning clauses, if children by a prior marriage are in the family, if there is a significant risk of death this year or next, or if it has been a while since your estate plan was drafted, an immediate review of your estate plan is imperative in order to avoid adverse or unintended tax or other consequences. In the current environment of change and uncertainty, there has never been a more important time than now to review your estate plan with your attorney to be certain that it accomplishes your personal objectives in a tax-efficient manner.

Craig Watson has practiced law in Sherman, Texas for almost all of his over 20 years of legal practice experience. Formerly a CPA for four years, Craig concentrates his practice in the areas of Estate Planning, Probate, Elder Law and Tax/Corporate Law. He is also Board Certified in Elder Law and can be reached at 903-813-8500.