With the Future of the Estate Tax Law Uncertain, the Best Advice Is to Stay Flexible in Your Estate Planning
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The 2001 Tax Act is a landmark change in the estate and gift tax laws, which will affect all estates currently subject to estate tax. To summarize where we are in the uncertain world of estate planning:
• The 2001 Tax Act provides for a phased-in reduction in the federal estate, gift and generation-skipping transfer (GST) tax rates
• The new law sets up a phase-in of an increase in the credit shelter amount from $1 million starting in 2002 and 2003 to a maximum of $3.5 million in 2009, and
• The repeal of the federal estate and GST taxes for individuals dying after December 31, 2009.
• The gift tax is not repealed and is now at $1,000,000 where it will remain under current law.
• On January 1, 2011 the sunset provisions of the 2001 Tax Act repeals all of these changes and reinstates the current federal transfer tax system as it would have existed on January 1, 2006.
As of January 2008, the fates of the estate and generation-skipping taxes
are undetermined. With the Republicans in the minority in
Congress, repeal of the estate tax prior to the 2008 elections is
unlikely. Carrying the thinking further, is it likely that the tax
will be repealed any time prior to 2011? Or, if a Democrat is
elected President in 2008, might the tax be made permanent, at the
current or higher rates, prior to
2010?
As a result of this uncertainty about (1) the permanency of estate tax repeal, (2) the reinstatement of the current transfer tax system in 2011, and (3) the possibility that future legislation may freeze the phased-in credit shelter amount at, say, $3.5 million, instead of a full estate tax repeal, estate planners and their clients
immediately must now revise existing plans and draft future plans (and especially trusts), to incorporate flexibility into current and future estate planning. Flexibility is especially important for plans where the person may die before January 1, 2010, the scheduled date of repeal of the estate tax, but whose trusts will remain in existence during the period that estate tax and GST tax repeal may be permanent.
Such flexibility could include:
• Comprehensive trust termination provisions;
• Appointment of a special power holder with the power to appoint the trust assets to the current trust beneficiaries;
• Use of a special contingent QTIP trust election;
• Disclaimer-based marital deduction planning; and
• Disclaimer-based GST tax planning.
In addition, present plans need to be reviewed to make sure that the new, higher credit shelter amounts provided in the new law do not make current formula trust provisions in existing wills obsolete and unfair for either a surviving spouse or the children of the testator
or testatrix. Where a spouse and the children of a second marriage are involved, the review is urgent to preserve the essential objectives of the estate planning. In almost all circumstances, a review of existing plans is in order.
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