"Back To The Future? What You Need to Know as Congress Mulls Estate, Gift and GST Tax Regimes"
As of Jan. 1, 2010, there is no federal estate or generation-skipping transfer tax, thanks to the Economic Growth and Tax Relief and Reconciliation Act of 2001. Unfortunately, the repeal is set to expire at the end of this year, so on Jan. 1, 2011, the estate, gift and GST tax system would revert back to previous levels, meaning a maximum unified exemption of $1 million and a top rate of 55%.
In order to finesse the issue of constitutionality, there have been suggestions that an executor might be given an election to have either the 2009 regime apply (meaning a federal estate tax with a step-up in basis) or the 2010 regime apply (meaning no federal estate tax but a carryover basis).
While estate planning amidst this uncertainty is difficult, estate planners do agree on one thing: Everyone should review their wills and revocable trusts to make sure that the use of formula clauses do not produce unintended results. Many wills include provisions setting aside the estate tax exemption amount for children (or a trust for their benefit), with the balance passing to the surviving spouse. If there is no estate tax and hence no estate tax exemption, the children may be disinherited. If, on the other hand, the will gives to children "the largest amount that can pass free of federal estate tax," with the balance passing to the spouse, then, arguably, the spouse is disinherited since in 2010 everything passes free of federal estate tax. (Some states, such as Idaho, Indiana, South Dakota, Tennessee, Utah, Virginia and Washington, have enacted legislation that provides for such formulas to be applied as if the 2009 estate tax rates and exemptions were in effect. New York is considering proposed legislation, but it has yet to be enacted.)
Besides reviewing your will, the following issues also should be considered in light of the federal estate tax's one-year suspension.