Much to the surprise of the estate planning community, Congress has failed to take action and has let us move into 2010 with no estate tax and no generation-skipping tax applying to individuals dying this year and to generation-skipping transfers made this year. For individuals dying after 2010 the estate and generation-skipping taxes come back with a vengeance with a lower exemption and higher tax rates than were in place for deaths occurring in 2009.
This one-year moratorium on estate tax may be good news from a tax standpoint for the heirs of individuals dying before the reinstatement of the estate tax if their estates would otherwise have owed estate tax, but is bad news for the many, many more individuals who will die during the moratorium and leave their heirs to deal with a new and very complex system for determining the income tax basis of inherited assets.
Many well-informed experts in this field believe Congress will deal with this situation during 2010 – reinstating the estate and generation skipping taxes for individuals dying in 2010 and changing the tax scheme for those dying after 2010. There are, however, serious constitutional and political questions as to whether the estate tax and generation-skipping tax can be reinstated retroactively to January 1, 2010. Frankly, based on the failure of Congress to deal with this issue prior to 2010 and the severe partisan division in Congress, it is reasonable to assume that nothing will be done in 2010. Suffice it to say, this is a mess.
Many documents will be difficult to interpret were death to occur during this moratorium because of references to estate tax concepts that are not applicable. In some plans in which a formula in a will or revocable trust calls for the maximum that can pass without estate tax to pass to children and the remainder to a spouse, the spouse may be disinherited. Because none of us know when death may occur and because (as Congress has just recently proved one more time!) no one can predict what action Congress will take and when there is a risk in not having your plan reviewed now. If you would for us to review your plan and discuss your options with you, please contact a member of our Trusts and Estates Group for an appointment.