As longevity planners, our aim is to bring clarity and guidance to the complexities associated with retirement and aging. By leveraging the collective experiences of our clients, Hatch Retirement Services is uniquely positioned to share ideas and perspectives relating to longevity…a bird’s eye view.
Fate of the Estate Tax Hangs in the Balance
Estate planning plays a crucial role in the identifying, organizing and securing assets in the overall longevity planning process. This process is ongoing and expert advice is needed at various stages along the way to help prepare for the transitional events and lifestyle changes older adults and their families will inevitably encounter.
One major development that will affect many families is the current status of the estate tax. On January 1, 2010, the United States Congress let the estate tax lapse: The 45% federal tax on estates worth more than $3.5 million for individuals (or seven million dollars for married couples) went to zero. This headline seems a very good thing. However the devil could be in the details, as the repeal of the estate tax may actually be detrimental in terms of taxes owed by heirs.
Where Things Stand
The origin of the current repeal dates back to 2001, when Congress increased estate-tax exemptions gradually and voted to eliminate the estate tax entirely in 2010. However, this legislation only had a ten year lifespan and since Congress has not acted to extend it, in 2011 the estate tax is slated to return to the same levels as before the 2001 law — a maximum 55% rate with an exemption of one million dollars.
Another big change in the rules is the complex notion of “carryover basis”. In 2010, instead of paying estate tax, heirs will inherit assets with the same tax basis the parent (or other benefactor) had. This means they must assume or carry over the deceased’s basis in the property. Since some property will have appreciated greatly over time, this could cause serious tax ramifications upon sale. Though under the repeal law, non-spousal heirs will receive a break: $1.3 million of inherited property will receive the “step-up” in basis – heirs will owe capital gains taxes only on the difference between the stepped-up value and the selling price. For surviving spouses, they will get an additional $3 million, bringing the basis total for a widow or widower to $4.3 million.
The Rub
If Congress does bring the estate tax back in some form in 2010, new problems will surface. Many people expect the reinstated tax to be retroactive to Jan. 1, introducing complex legal challenges from wealthy estates. And if Congress fails to reinstate an exemption of at least $2 million to $3.5 million, heirs of smaller estates after 2010 will suffer.
The estate tax limbo also creates another potentially nightmarish scenario. To take advantage of the rules under the old regime, estate plans often contain formula clauses to specify what goes to a “bypass trust” or “credit shelter trust” and what goes to the surviving spouse without triggering a tax. Often, these documents would include a statement such as “I leave to my trustees the maximum amount that can pass free of estate tax” or “the minimum amount necessary to avoid the imposition of an estate tax.” Since there is currently no estate tax, individuals who die in 2010 with this language in their estate plan could have unexpected outcomes.
How to Deal
Given the crowded legislative schedule and continuing rancor in Washington, it’s not clear when — or even whether — Congress will come up with a more permanent solution for the estate tax going forward. One scenario though is that a two-year patch of 2009 law that could come later in the year within a larger tax package targeted at deficit reduction. There are other less likely scenarios that would offer different mixes of the exemption amount and tax rate.
The fluidity of the situation raises serious questions about the validity of wills and trust documents handled this year. Any ambiguity in a will or trust could become the basis for an heir suing a trustee for negligence or breach of fiduciary duty.
We recommend that you work closely with an estate attorney to determine if legal documents need to be created or altered in favor of flexibility and complexity. More than ever, taxpayers need the careful assistance of estate planners in their efforts to avoid massive tax burdens and maximize the value proposition of their estates.
Contact Us:
1650 Borel Place, Suite 227
San Mateo, CA 94402
T-650.573.9960
F-650.573.9930
info@hatchplan.com
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