The 2010 Federal estate tax repeal is creating a mess for families whose loved ones have passed away since the first of the year. With no immediate solutions pending before Congress, states have begun to say enough is enough and put together legislation to help their residents as much as possible.
Due to the way that most good estate plans are written, specifically those which have been created, updated, or revised since changes to estate tax law took effect under the Bush administration in 2001, the complete repeal of the estate tax can have some potentially catastrophic effects. Everyone was entitled to an estate tax exemption under the previous estate tax laws and therefore married couples would seek to maximize their tax benefits by using up the exemption in the estate of the first to die and passing only the taxable assets to their spouse. Then when the second spouse passed away, they could use their own exemption to pass more of their money tax free.
The Federal estate tax exemption steadily changed over the last ten years and to prevent the need to rewrite wills and trusts every time a change occurred, estate plans used a formulaic approach. Now with the estate tax repeal, many times the entire estate of the spouse that dies first will pass to other relatives such as children, leaving the living spouse with nothing.
States are recognizing this and have begun to propose legislation to help families who could fall into this tax exemption trap. Some have proposed that anyone dying while the laws are repealed may use December 31, 2009 as their date of death, while others simply provide that any tax terms or formulas should be interpreted as though the laws of 2009 were still in effect. Either way, this can help keep families out of expensive legal battles over the intended disposition of assets and prevent them from having to pay extra, unanticipated state taxes on inheritances or estates.
While states such as Maryland, Nebraska, South Dakota, Tennessee, Florida, New York and Washington have followed Virginia’s lead with some form of legislation in this area, I have yet to see anything proposed here in Pennsylvania. For those keeping score, chalk one up for states rights advocates, your move Congress…..
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