It's 2010, and for the first time in 95 years, there is no federal estate tax, even for the wealthiest individuals. However, it's not time to celebrate yet. We'll return to our familiar tax system in 2011, but at a higher rate with a much lower exemption, if Congress doesn't act.
As Americans now face a year without estate taxes, it's important to know the possible impact on family and loved ones.
This strange situation is a result of a 2001 law to gradually repeal the estate tax. Permanent repeal was impossible because of budget restraints. Last year, a $3.5 million exemption was in place. For most of 2009, it was assumed that Congress would end up keeping the exemption in place for 2010 and beyond, meaning business as usual. However, by the end of the year, no action had taken place. Therefore, we entered 2010 with no estate tax at all.
There's guessing that Congress will restore the estate tax with a $3.5 million exemption early this year. It may even be retroactive. Others believe there's a chance the political climate will make it difficult to reinstate the estate tax this year, leaving all bets off for 2011 and beyond.
Review your plan
Because people now live in a world without an estate tax, it's a critical time to review documents with an attorney and ask hard questions. For example:
"If I die at a time when the estate tax is not in effect, are my assets still going to go the way I intended?" Language in a will or trust that was clear when the estate tax was in place could skew the results in a crazy year like 2010.
"Is my estate arrangement to 'B' or not to be?" All puns aside, most married couples' basic estate tax plan is a revocable trust, which is a trust that can be changed at any time. The trust is divided when one spouse dies, known as an "A-B" arrangement, with part becoming irrevocable, meaning it's unable to be changed after agreements are signed. This is good estate tax planning.
However, what clients may not know is that the irrevocable "B" trust may be made flexible for the survivor while still complying with the tax law. If someone has this arrangement or is considering it, both spouses should clearly understand how it works and what type of flexibility the survivor would have, so the trust document states what the couple wants it to state.
Non-estate tax reasons for planning
With all the uncertainty in the law, the least likely outcome is a permanent estate tax repeal. However, it's critical to realize that even if there were no estate tax, there are even more important reasons for having a valid and effective plan in place.
• To avoid family conflict and ensure your wishes are carried out, with respect to who receives assets and which individuals are in charge of making decisions.
• To protect beneficiaries who are too young, irresponsible or who have special needs by placing their inheritance in an appropriate trust. This will protect them from themselves or outside forces and keep them qualified for necessary governmental benefits.
• To provide protection if you use continuing trusts, even for mature and responsible beneficiaries. Arizona law can keep an inheritance secure from spouses in the event of divorce, from creditors in the event of a lawsuit and from estate taxes.
It's hard to predict what the rest of 2010 will have in store. With planning and guidance from your attorney, an estate plan can stay intact and perform the way it was originally intended.
Craig Wisnom is an attorney with Bogutz & Gordon, P.C., a Tucson-based law firm concentrating in estate planning and elder law. He may be reached at firstname.lastname@example.org.