Estate Tax: What Now?

So Congress finally did it. Well, not final as in really and truly final. Final as in, for the next two years. Through Dec. 31, 2012, there will be a top federal estate tax rate of 35% on estates over $5 million. (Unless Congress changes its mind before then. In this volatile economic and political climate, nothing is impossible.)

For now, like every estate planner on the planet, I'm figuring out just what it all means for clients. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 will present new estate planning opportunities, that's for sure; but the question is, how best to take advantage of them? I'll keep you posted as developments unfold. For now, here are some useful points to guide you.

1. Families of those who die in 2010 have a choice: elect to use the new law, or go by the pre-2010 tax code. The new law allows for a full step-up in basis, thus alleviating capital gains on inherited assets. But families who are more concerned with estate taxes than capital gains taxes will probably still opt for the pre-2010 regimen.
2. Do not forget that many states impose an estate tax. And cash-strapped states aren't likely to do away with that revenue anytime soon. New Jersey may tax estate assets in excess of $675,000; New York, estate assets over $1 million. If you live in Florida but the appeal of being closer to your kids and grandkids is making you think about moving back there, you’ll need to do the appropriate tax planning before you pack your bags.
3. You current tax planning should probably be reviewed. For example, many married couples with substantial asssets who established an estate plan years ago have a Credit Shelter Trust (Bypass Trust) as the crux of their plan. This requires that trust assets to be split into two pots upon the death of the first spouse. But if your estate is not taxable under the new law, having to split the assets accomplishes nothing. It only incurs additional bookkeeping, fees and paperwork. I am recommending that clients who fall into this category consider establishing a Spousal Option Trust, which lets the survivor decide if splitting assets into two pots is worthwhile, depending on the tax situation at the time of the first death.
4. Remember, your estate plan is about LIFE, PEACE OF MIND and FAMILY HARMONY - not just death and taxes, though the latter get far more attention in the press. The vast majority of Americans do not have a taxable estate, anyway. If you fall into the majority, you still need a sound estate plan that authorizes someone to make your medical decisions and financial decisions if you become ill or incapacitated,  keeps the courts out of your affairs, and ensures a smooth transition when you pass away that allows your loved ones to avoid unnecessary hassle, delays and fees.

More on what the new law means to you in coming weeks, dear readers.