Estate Planning in 2010
As we progress through 2010 there is a great deal of uncertainty as to the status of the Federal estate tax. Technically, as of January 1, 2010 there is no Federal estate tax. As is explained in more in the article on Tax and Estate Planning After the "Repeal" of the Estate Tax, the Federal estate tax law has been repealed as of January 1, 2010. If Congress does nothing, in 2011 the "old" Federal estate tax law will come back into place with the exemption dropping back to only $1,000,000 (with the top marginal estate tax bracket increasing from its present 45% rate to 55%).
Many tax commentators believe that Congress will act to effectively reinstate the $3,500,000 exemption that was in effect in 2009. In fact, legislation was proposed that would have made this change, but Congress failed to act on this prior to the end of 2009. Whether this change will occur or not remains to be seen. Given the current budget crunch, the idea of repealing the estate tax law seems unlikely. Ironically, if Congress does not act and the "old" rules come back into place in 2011, the Federal government will actually collect more revenue because the exempt amount would be reduced to only $1,000,000 and the top marginal bracket would increase by 10%.
What is also unclear is that if Congress does reinstate the law as in effect in 2009, what will be the effective date of the reinstatement. Some believe that it would be made retroactive to January 1, 2010, while others would argue that a retroactive tax bill would be unconstitutional and that any change should be made as of the date the law is passed. Only time will tell what Congress will do. Hopefully, this issue will be addressed fairly quickly. As more and more time passes, the possibility that Congress will do nothing and allow the "old" rules to come back into effect seems more likely.
While the status of the Federal estate tax law remains in flux, it does not mean that estate planning should be ignored until the law is clarified. Of course, for many people, estate planning is a not exactly a "hot" topic. After all, planning for one's demise is not the most pleasant matter to address. As a result, many people procrastinate when it comes to getting their affairs in order. Recent events may give people even more reason to put off planning. With the recent downturn of the economy, the values of retirement accounts, investments and real estate have dropped significantly. Some will use that drop in value to justify putting off estate planning. Add to that the uncertainty about the status of the Federal estate tax law, and it can be easy to find an excuse not to address this important issue. The fact of the matter is that estate planning remains an important topic for everyone.
Estate planning fundamentally involves planning on how your assets should be disposed of. While minimizing estate taxes should be part of any good estate plan, taxes are not the only concern. Making sure that your assets pass to those family members, friends, and/or charities in the manner that you wish should be the paramount concern. If your goals for disposing of your assets can be accomplished while minimizing estate taxes, even better.
Regardless of what happens with the Federal estate tax exemption, one must still contend with state estate tax issues. Many states, Massachusetts being one of them, have enacted their own separate estate tax. See the article on The "New" Massachusetts Estate Tax. The Massachusetts estate tax exemption is only $1,000,000. If the total value of your estate exceeds this latter amount, a Massachusetts estate tax may be due. Keep in mind also that while the effective maximum tax rate in Massachusetts is only 16%, the Massachusetts tax is actually assessed on the entire value of one's estate, not just the excess over $1,000,000.
While more changes to the estate tax laws may be forthcoming, postponing addressing your estate planning objectives is never a good idea. An estate plan should evolve over time, be reviewed periodically, and revised from time to time.