At Sheehan Phinney, we remind our estate planning clients that it is a good idea to review estate planning documents periodically, not just for content-related changes, but to keep documents current with the latest tax changes. In the typical analysis of estate planning, the effect of federal taxes is taken into account when designing what kind of documents are needed and what complexity attaches to estates of certain economic sizes.
All of that was thrown into confusion when the United States Congress, at the end of 2009, failed to enact any legislation to avoid the sunset provisions of law put into place in 2001. As clients may recall, the applicable exclusion amount (that is the amount that can pass tax-free to heirs) grew over time from one million dollars to $3.5 million in 2009. On January 1 of this year, the entire estate tax was repealed and present law provides that it will return in 2011 at the 2001 level of one million dollars unless Congress takes further action.
At this moment, there is no federal estate tax, so people dying now have an unlimited amount that can pass free from tax. The trade-off of that, unfortunately, is that there will be a capital gains tax to beneficiaries on all but the first $1.3 million of inherited assets. The capital gains tax is significantly lower than the estate tax rates so this may not be something that anyone worries about. Those who would have had a tax-free estate and stepped-up basis under the $3.5 million cap, however, now face a different set of issues.
Add to all of this the fact that Congress is expected to re-enact the estate tax credit either at the prior 2009 level of $3.5 million or some other amount and make that change retroactive to January 1, 2010. Whether retroactive setting of the tax is constitutional is going to be tested in the courts. How long it takes Congress to summon the discipline to act on this subject also is unknown at this point.
Clients and others should pay close attention to what Congress does in regard to this matter and, if there are questions, should feel free to contact the attorneys in the Estate Planning and Probate Practice Group at Sheehan Phinney Bass + Green, for guidance.
This article is intended to serve as a summary of the issues outlined herein. While it may include some general guidance, it is not intended as, nor is it a substitute for, legal advice. Your receipt of Good Company or any of its individual articles does not create an attorney-client relationship between you and Sheehan Phinney Bass + Green or the Sheehan Phinney Capitol Group. The opinions expressed in Good Company are those of the authors of the specific articles.
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