Estate Tax Law Update

It’s actually happened! Due to Congressional inaction - some would say gross irresponsibility - the current estate tax rules changed dramatically on January 1, 2010 as the unified exemption amount (the amount one can pass estate tax-free at death) became unlimited.  The catch, unfortunately, is that a taxpayer has to pass away during 2010 to take advantage of this benefit as the current law expires on December 31, 2010 and the estate tax rules revert to the very unfavorable law in effect in 2001.  Further, one cannot take advantage of the new unlimited exemption amount by lifetime giving because the credit for gift tax purposes remains at $1,000,000 per person.

Congress has been aware of this impending situation for years and attempted to revise these estate tax rules before the end of 2009. But to the frustration of estate planning attorneys and other observers, was unable to agree on a permanent or even temporary solution.  However, Congress is working on legislation that would simply extend the 2009 rules (which provide for a $3,500,000 unified credit and 45% estate tax rate) through 2010 or 2011. Presumably, Congress will deal with the issue permanently next year, though we thought incorrectly that legislation would have been passed before now.  There is speculation that any such legislation will be made retroactive to January 1, 2010.  Meanwhile, if the estate tax is eliminated for even a period of time, no longer would a person who died during that period receive an unlimited increase in the tax basis of their assets (a “basis step up”) and instead only $4,300,000 could possibly receive a fair market value basis for income tax purposes.

In an unrelated year-end subject for California residents, a new law went into effect January 1, 2010 that dramatically limits the effectiveness of “no contest” clauses in wills and trusts and makes most existing no contest clauses invalid.  A no contest clause is a provision in wills or trusts that attempts to minimize the likelihood a named beneficiary will challenge the terms of the estate plan in court by disinheriting such beneficiary for an unsuccessful challenge.  Many living trusts contain such a provision.  The new law limits the type of challenges that will be deemed a “contest” and effectively invalidates most existing clauses that were not irrevocable prior to January 1, 2001.  Even for trusts that were irrevocable prior to such date, such provisions will only be valid in limited circumstances and only after petition to the court.

Clay Stevens