It’s cold here in Philadelphia on this last Friday in January, and some spouses may feel they’ve been left out in the cold if the federal estate tax is not reenacted and applied retroactively in 2010. The way that most good estate planners have written wills for wealthy clients subject to the federal estate tax has the potential to leave the surviving spouse with nothing from the decedent’s estate.
Estate plans have generally been written with the expectation that the estate tax is a fact of life and may see modest changes to the value of estates subject to the tax, but not be repealed altogether. Most estate planning documents for wealthy individuals pass the portion of an estate which is eligible to pass tax-free into a trust for their children in order to take full advantage of the tax laws. The tax exemption was $3.5 million in 2009 but increased at different increments over the last 10 years and therefore estates attorneys used a formulaic approach to determine how much of a decedent’s estate would go into a trust and how much would be left directly to a spouse. This was great because it allowed the estate planning documents to be flexible and provide the greatest tax benefits to a client without requiring additional changes to the documents.
With the estate tax repealed, these once beneficial formulae will pass the entire estate of the decedent into the trust for the children because it all passes free of tax. If this occurs, the surviving spouse will actually receive little or nothing from the estate, despite the decedent’s original intent to provide for his or her spouse.
There are options for a spouse faced with this situation, including an opportunity most states provide to a surviving spouse allowing them to elect against the contents of a will and take a statutorily provided portion of the estate, but doing so can be a time consuming and expensive proposition. Of course, it is also likely that the laws will be reenacted retroactively and additional planning will eventually prove unnecessary.
My advice? Talk to your planning professional if you have a large estate and a plan in place to help reduce your estate taxes. (And if you have a large estate and don’t have a plan in place, go get one!) Some modest changes to your current plan can assure that all of your loved ones are properly taken care of in the event no changes are made by Congress this year.
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