The federal estate tax law is currently in a state of unprecedented confusion. The 2001 Tax Act set in motion a series of changes culminating in a one-year “repeal” of the federal estate tax during 2010. This estate tax “repeal,” however, is coupled with an effective increase in the capital gains tax on inherited assets when sold subsequently. For estates of persons dying just during 2010, the 2001 law eliminates the estate tax for 2010 but introduces a highly complicated new set of laws regarding income tax basis and other matters, including taxable gifts (the tax on gifts made during a person’s lifetime was not repealed). The “old” estate tax law automatically returns in 2011, if Congress does nothing. It was widely expected that Congress would act before the end of 2009 to change this, but it did not.
By reason of the failure of Congress to act (yet), there is substantial uncertainty even with regard to what law actually applies to persons who have died since January 1, 2010. If Congress is able to reach agreement on anything regarding this law, it is anticipated that the change would be made retroactive to January 1, 2010. The legal effect of an attempted retroactive application of Congressional action may not be resolved for years. Some estates are benefitted by the 2010 law currently on the books, and other estates would be more benefitted by the new law (likely very similar to pre-2010 law) made retroactive.
All of this may create substantial uncertainty in your estate plan. Some estate plans are designed to apply the estate tax laws that have been in place for decades in determining certain allocations of assets. In light of the current reality that the “new” law could apply to an estate of a person dying during 2010, each plan should be considered to determine whether changes are needed. We highly encourage you to discuss these questions with your estate planning attorney either by telephone or in person.
It is deeply unfortunate that Congress’s failure to act may result in many estate plans needing revision for a set of laws that may (or may not) be effective only for persons dying during the year 2010. In most cases, only modest changes might be needed. However, it may also be the case that other changes in your personal circumstances or other areas of the law may make this an opportune time to revisit your estate plan and consider whether other general changes are appropriate. For example, would changes in net worth, or changes in the amounts that can pass free of estate tax ($3,500,000 each in 2009, changing to $1,000,000 each in 2011 or perhaps some other amount if Congress is able to act this year), alter your wishes regarding your estate plan?
It is important that you consider these questions to make an informed and well-advised decision regarding how you wish to have your estate allocated under these federal tax provisions.