John Worley Blog

Estate Taxes in 2010 – Never Never Land

John Worley - Monday, December 06, 2010

Estate planning has been uncertain for the last few years as the time drew near for the expiration of the current estate tax structure. The federal estate tax expired at the end of 2009, so in 2010 there has been no tax – so far, anyway. The majority of Americans won’t notice the change because their estates are too small to be affected. But this failure by by congress to act is causing some degree of confusion for estate planners and their clients with estate of more than $1 million. Most people assumed Congress would enact legislation to reinstate the tax by the end of 2009. But they didn’t. Many think Congress will restore the tax to the previous level – the exemption hit $3.5 million in 2009 – and make it retroactive. If they don’t act before the end of 2010, it will come back on its own in 2011 at $1 million.

We’re now in this Alice in Wonderland world where we have no estate tax in 2010 and no real idea when and if congress will act to put a new estate tax structure in place. It’s hard to do planning for people now. It would have never occurred to anyone that Congress would fail to act. Most think that they’ll repair that, but we don’t know how or when.

Most estate planners draft documents with a tax formula provision based the estate tax exemption in place under tax law in the year of death. With no estate tax in 2010, the exemption amount is thought to be zero. In a year of estate tax repeal, this formula may have unanticipated results because the calculation based on the exemption amount does not operate properly. Depending on how the will or trust document is written, assets could conceivably go all to one beneficiary or another — a result that may not have been intended by the property owner.

The current situation is a mess, and it would be wise for everyone who drew up a will after 2001 (the last major estate tax bill) to review them. You probably shouldn’t change them until there’s more clarity from Congress about what will happen next, but in certain circumstances, the outcome of current formulas could have very unexpected results and they may need to be modified.

Stayed tuned for more…

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