The are a host of questions swirling around the one-year repeal of the estate tax for 2010 and the scheduled year-end sunset of EGTRRA. We discussed these issues on last month’s Classroom Conference Call for Academy member attorneys and on the Members’ list. On that call we discussed that formulas used for the past many years would result in the maximum share of the client’s assets being funded into the Family or Credit Shelter Trust. For the vast majority of clients, this would be consistent with their goals of minimizing future estate taxation.
However, your state may be muddying the waters. Many states are considering legislation which would construe Wills and Trusts for people dying in 2010 as though they had died in 2009 – when there was a federal estate tax after a $3.5 million applicable exclusion.
Example: Client dies with $10 million in his married separate living trust. Clients documents, prepared prior to 2010, fund the Family Trust with the maximum amount that can be passed free of federal estate tax. Ordinarily, this would fund the Family Trust with the entire $10 million estate and would be consistent with the client’s goal of tax planning.
If your state passes the legislation under consideration in many states, in the example above only $3.5 million would be funded into the Family Trust. As a result, $6.5 million which otherwise would have gone into the Family Trust will go to the surviving spouse and will not escape taxation at the death of the survivor.
If your state passes such legislation, it may be necessary to override the application of the new statute specifically to achieve the optimal result for tax planning: full funding of the Family Trust.
It has often been said that the road to hell is paved with good intentions. It is possible that your state legislature, attempting to correct “problems” due to the federal repeal of the estate tax, may thwart your clients’ estate planning and tax planning efforts.
Be on the lookout for legislation in your state!