Congress Finally Acts -- Now What?

What happened?

Congress finally passed and on December 17, 2010 President Obama signed into law the "Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010" (I guess that is going to be known to tax lawyers as "TRUIRJC" which I can't say with a straight face". The "2010 Tax Act" (my preferred reference), in addition to the continuation of the 2001 tax cuts, made substantial changes in estate, gift and generation skipping transfer ("GST") tax provisions.

First, the estate and GST taxes were reinstated as of January 1, 2010. The gift tax, which had not been repealed, remains. Executors for someone who died in 2010 can elect out of the estate tax and be subject to the law in effect on January 16. If you don't want to pay estate tax, you are subject to hated 'carry-over basis adjustment'.

Second, and this is the really big news is the virtual elimination of those taxes with the new $5,000,000 exemption ($10,000,000 for married couples). The intent of Congress was to tax only the 'very wealthy' and not just your run of the mill multi-millionaire. The very wealthy only get a tax rate reduction to 35%.

Third, just for the fun of it, the new rules only apply for 2010 through 2012. The pre-2001 estate tax provision with the $1,000,000 exemption and 55% estate tax rate.

What should I do now?

So you are thinking that you don't have anything near $5,000,000 so I can just ignore estate planning. That would be just too simple. My last article discussed the uncertainty caused by the limited life-time of the new rules and how even simple plans will need to be adjusted to meet the needs both today and in 2012.

You need to have your Will or Trust reviewed by a qualified attorney and, more likely than not, she will want to make some serious changes to provide flexibility regardless of what estate tax program will be in effect on your death.

If your plan includes provisions to divide assets based upon a formula clause, it needs to be reconsidered so your intended beneficiary does not bet too little or too much just because the exemption amount fluctuates in the future. Those provisions can result in unintended beneficiaries receiving your hard earned assets. that your loved ones continue to be treated how you wanted under the old law. This is a real problem for any married couple.

If your plan does not provide inheritance protection for your child, you really need to consider adding an Inheritance Protection Trust. That kind of trust will ensure that the inheritance will not end up in the hands of your child's spouse in the event of death. The inheritance can also be protected against the risk of catastrophic injuries.

All of the non-tax reasons why you need a Will or Trust are not affected by the new tax law. If you don't think you have to worry about taxes just now, you need to have a solid estate plan in place to protect your loved ones in the event of an untimely death.

Lots to think about. I know that you probably don't want to think of any of this during the holidays, but I suggest you put a review on your to-do list for January.

Happy holidays and I'll see you next year.