On January 1, 2010, tax legislation put into place by Congress in 2001 sounded the death knell for both the federal estate tax and generation skipping transfer (GST) tax—pun intended. Currently, the repeal of these taxes is only valid for the balance of this year. And while rumblings from Washington suggest that the repeal may not last the entire year, some have suggested that the health care debate may end up trumping the efforts of certain legislators who wish to cut short the one year repeal. (Yes, a repeal of the repeal of sorts—only in Washington.)
How does the repeal affect you?
Many estate plans are drafted in such a way that tie gifts to be made upon death to one or more types of estate taxes. For example, if a married woman has an estate plan which calls for her children to receive the maximum amount that could be given away at death, free of estate taxes, and her spouse to receive the balance (a common disposition scheme, especially if her plan was prepared prior to 2001), the recent repeal of estate taxes altogether would, under such a disposition scheme, effectively disinherit her spouse!
However, it should be noted that repeal does not necessarily impact just the estate plans of married individuals. Many plans call for gifts to be made to grandchildren, or others in remote generations, based upon the generation skipping transfer tax. In its simplest form, the GST tax is assessed for the privilege of passing wealth to individuals who are part of a generation that is at least two generations below that of the maker of the estate plan. Prior to January 1, 2010, most people were able to pass up to $3.5 million to such individuals totally free of any generation skipping transfer taxes. (This is typically referred to as the GST tax exemption.) But, as of January 1, this tax is no longer in existence—again, just for this year. While this may be seen as a good thing to most people who wish to benefit their younger loved ones, certain estate plans are drafted in such a manner that they may actually cut these younger folks out of the plan altogether if the maker of the estate plan were to die during the period of repeal.
Example: A grandmother directs that upon her death the balance of her GST tax exemption which remains at her death be distributed, in trust, to her grandchildren. If this grandmother were to pass away during repeal, she technically has no GST tax exemption remaining since no such tax is then in existence. In short, her intended gift to her grandchildren may end up not being made at all.
Rest assured, however, that simple remedies can be put in place with most plans to address the issues caused by this, perhaps, temporary repeal. Now is the time to have your plan reviewed, for there is no telling when Congress will, if at all, fix the death tax regime.