Feb. 18, 2010 – There is an old saying that nothing is certain but death and taxes – but now Congress has found a way to cloak both in a fog of uncertainty, at least for estate planning purposes.
The crux of the issue is the one-year repeal of the federal estate tax for calendar year 2010, which was created as part of the federal tax cuts enacted in 2001. When those tax cuts expire for deaths in 2011 and thereafter, the estate tax will be back on the books with a $1 million per estate exemption and a top rate of 55% (compared to the $3.5 million exemption and 45% top rate in effect for deaths in 2009).
While the practical problems associated with this sequence of events are obvious, given the gridlock in Washington it is far less clear if Congress will be able to come up with a solution this year – and even if Congress does act, it is unclear how such legislation may apply to deaths occurring between Jan. 1, 2010, and the bill’s enactment.
This uncertainty poses major estate planning challenges for both attorneys and their clients. On the face of it, even a one-year reprieve from federal estate taxation would appear to benefit affected beneficiaries of individuals who die in 2010, but Atty. Mark Shiller, a member of the State Bar’s Real Property, Probate and Trust Law (RPPT) Section, cautions that the unsettled nature of the law creates a “significant potential for uncertainty and ambiguity arising in the administration of wills and trusts which did not contemplate the potential absence of the estate tax. This is especially troublesome given that an estate tax in some form or another has been relevant to decedents’ estates and trusts since 1916 – a total of 93 years!”
In certain circumstances, the consequences could include the unintended disinheritance of spouses and protracted litigation among family members.
Shiller notes that at least 10 other states and the District of Columbia are considering or have enacted legislation to provide greater certainty. “First to act was the state of Virginia. Their legislature is currently considering a proposal to essentially administer wills and trusts as if the 2009 estate tax law continued to apply to transfers in 2010.”
While this approach is elegant in its simplicity, Shiller warns that “it will produce results contrary to a testator or settlor’s intent in many circumstances.” He proposes a different response based on the assumption that “most estate tax planning formulae are incorporated into wills and trusts so that the total transfer taxation on a family as a whole is reduced.” He adds that the beneficial interests of the credit shelter trust beneficiaries and a spouse are more likely to be a factor in second marriage circumstances and that any state-level response “should create certain presumptions based on the above, but allow for different application of the formulae under certain circumstances.”
Shiller and other members of the RPPT Section are consulting with other interested parties, including the State Bar’s Elder Law Section and the Wisconsin Bankers Association, to develop a legislative proposal within that broad framework. He cautions, however, that because the Legislature is scheduled to conclude work on routine legislation no later than April, the outlook for a legislative solution at the state level is uncertain.
The RPPT Section is collaborating with the Elder Law Section and others to include a segment on the estate tax issue in the 23rd Annual Law and the Elderly CLE program on May 14. Interested members should watch WisBar for additional information about the CLE, as well as any updates regarding pertinent federal and/or state legislative developments.
By Tom Solberg, Media Relations Coordinator, State Bar of Wisconsin
Related article:
Fundamental changes in federal estate tax law poses challenges for estate planners
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