To the surprise of everyone in the estate planning community, Congress failed to address a critical estate and generation-skipping tax matter before the end of 2009, resulting in the repeal of the federal estate tax. However, this repeal is for 2010 only. In 2011, the exclusion for federal estate tax reverts back to $1,000,000. How is this possible, and what effect does it have on couples’ estate plans, particularly second marriages?
Since 2001, the federal estate tax has been gradually phasing out, with an increasing exclusion from federal estate tax each year. In 2009, the exclusion increased to $3,500,000. In 2010 however, the federal estate tax disappears, only to return in 2011 with only a $1,000,000 exclusion. To further complicate things, although the federal estate tax disappears in 2010, the unlimited step-up in basis for inherited assets also disappears; and a decedent’s estate is permitted to increase the basis of assets by only up to a total of $1.3 million with an additional $3 million if there is a surviving spouse. How does this affect estate planning?
Many couples’ estate plans were written to shelter the exclusion at the death of the first spouse by using a “by-pass” or “shelter credit” trust, and having the balance pass to a spouse (in trust or outright) or possibly to the children of a first marriage. Under the current law, the credit shelter trust may be either underfunded or overfunded or, in 2010, not funded at all because no exclusion amount applies. With estate plans for second marriages where often an individual wants to provide for both a spouse and children from a first marriage, if nothing is allocated to the credit shelter trust (for the benefit of one group of beneficiaries) then everything will go to the remaining group of beneficiaries, and the result may certainly be something other than what was intended. In 2011, when the exclusion is no longer unlimited but reverts back to $1,000,000, a completely different but equally problematic group of issues arise, also possibly resulting in an estate plan other than what was initially desired.
If you have a trust or trust language in your will, you need to be aware of these issues. You should have your estate plan reviewed by your estate planning attorney, particularly if your immediate health is an issue, to make sure that it effectuates your intentions and wishes. It also does not hurt to try to follow this topic in the news. Congress will eventually address these issues, probably either this year or next. We just don’t know when or what will be the end result. Stay tuned to our blog and we will report any new developments!
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Joseph E. Balmer
Joseph Balmer manages the Probate, Trust and Estate Administration department at Dayton, Ohio, law firm, Holzfaster, Cecil, McKnight & Mues, and has been certified by the Ohio State Bar Association as a specialist in Estate Planning, Trust and Probate Law since 2006.