Congress Fumbles Estate Tax Reform: Do you need to update your trusts?

First off, you should review your will and trust periodically, especially if there have been any changes in your family or life or if there are changes in the law.

Secondly, Congress has let the American people down with respect to the estate tax. Almost anyone with trusts with an a-b / bypass / credit shelter type format should review their trusts now.  Some people will need to update their estate plan documents.

The Bush tax cuts reformed the federal estate tax.  There was a reduction in the tax through a staggered series of increases in the offsets against the tax and a reduction in the rates.  This culminated (seemingly) in a repeal of the estate tax in 2010.

Great news, right?  Not if you hope to live until 2011.  In 2011, the tax rises from the dead at 2001 levels.  That’s right, the tax is scheduled to rise dramatically in 2011 and expose more people than ever to the tax.

Also beware in 2010 that the step up in basis is repealed for many taxpayers.  This means that heirs won’t have to worry about the estate tax, but they may have to deal with taxes on capital gains.

How does this affect you?  Many estate plans were written with the value of gifts determined by formulas to reduce the estate tax exposure to the lowest possible amount. Estates were divided into 2 parts and were left to different sets of heirs or to heirs in different manners, etc.  Now, one of those parts may never be triggered and your
intentions thwarted.

No professional in the field ever expected to get to 2010 without estate tax reform.  Many thought the tax would be permanently repealed.  Some thought it would be frozen at 2009 levels.  Everyone expected something to happen.  Unfortunately, Congress has become so dysfunctional and the federal deficits so large that all bets are off.

The House passed a measure that would have looked mostly like a freeze of 2009 levels. The Senate, bogged down with Healthcare, never got around to anything.  Both parties and both houses have combined to produce only conflicting rhetoric and confusion.

So, where does this leave you?  It leaves you with a need to carefully review your estate plan with an attorney familiar with estate and gift taxes.