2010 Estate Planning Mess
2010 has begun and we have entered the twilight zone of estate taxes.
What will congress do now?
- Nothing — I originally wouldn’t have given this one much chance, but now I see this as a distinct possibilty
- Reinstitute 2009 exemptions retroactively (may be unconstitutional)
- Reinstitute 2009 exemptions non-retroactively
Current Law for 2010
Beneficiaries receives property with an adjusted basis equal to the lesser of the decedent’s basis or the asset’s fair market value on the decedent’s date of death. Thus, EGTRRA eliminates the automatic “step-up” to the date of death value but retains the “step-down” for depreciating assets.
To offset this loss of the step-up in basis, EGTRRA provides that the executor (or other person responsible for the decedent’s property) may allocate a $1.3 million “aggregate basis increase” on an asset-by-asset basis up to the particular asset’s fair market value at the date of the decedent’s death. Assets left to a spouse may receive an additional $3 million “spousal property basis increase,” also asset-by-asset, up to the particular asset’s fair market value at the date of the decedent’s death.
Gotchas – Credit Shelter Trust Funding Formula
Under a typical living trust or will, the document creates at least two trusts, a credit shelter (aka bypass or Family) trust and a marital trust (possibly with QTIP provision). The credit shelter trust funding formula clause often says something like: the amount of the decedent’s property that will pass to the credit shelter trust equals the “maximum amount that can pass free of federal estate tax;” the balance of the decedent’s assets pass to the marital trust.
If the client dies in 2010, this estate planning language will cause the unintentional over-funding of the credit shelter trust and under-funding of the marital trust. When the credit shelter and marital trusts contain identical beneficiaries and dispositive provisions, this over-funding of the credit shelter trust and under-funding of the marital trust is not a big deal. However, if the credit shelter and marital trusts contain different beneficiaries and/or different dispositive provisions, this may cause unintended and undesirable consequences.
For example, with second or subsequent marriages, and in particular where there are children from a prior marriage, the the surviving spouse’s rights is limited to the income from the marital trust, while the children from the prior marriage are often the beneficiaries of the credit shelter trust. If the client dies in 2010, all of the client’s assets will pass to the credit-shelter trust, and the marital trust – i.e., the surviving spouse – will receive nothing! This is certainly not what was intended and it will not provide the state’s statutory minimum to the surviving spouse. With few or no assets left to the surviving spouse, he or she may resort to a lawsuit against the trust or estate for the statutory minimum, thereby increasing legal fees and wreaking havoc with the estate plan.
The reverse can also be a problem if the funding language refers to the exemption amount. In that case the money will all go to the marital trust and none will go to the credit shelter trust.
Gotchas – Lifetime Powers of Appointment
If the surviving spouse has a lifetime power of appointment over the QTIP trust the executor (or other person responsible for the decedent’s property) cannot allocate the spousal basis increase to marital trust property. Alternatively, the executor can allocate the spousal property basis increase to QTIP property over which the surviving spouse has only a testamentary power of appointment.