Client Alert
Estate Planning Group

EMERGENT NEED FOR ESTATE PLANNING REVIEW

CLIENT ALERT
January 8, 2010

Dear Clients and Friends:

As of January 2010, almost every U.S. Citizen with even “modest” assets must revisit his or her Estate Planning. For us to make such a drastic statement, a little history is in order.

In 2001, a law was enacted that made reductions in the federal estate tax and generation skipping transfer (“GST”) taxes through 2009 and then repealed the tax, effective for one year only, in 2010. That law expires and the original 2001 estate and GST tax laws are reinstated in 2011, resulting in a substantial tax increase. Despite assurances that Congress would rectify the estate and GST tax situation, it has failed to extend the 2009 estate tax exemption ($3.5 million for estate and GST tax) and has created a very uncertain tax landscape. Congress has vowed to revisit the estate tax legislation as early as possible in 2010. It is possible, but not certain, that Congress will choose to retroactively restore the 2009 estate and GST tax laws. This will most likely cause court challenges and further uncertainty.

In the meantime, taxpayers are now forced to deal with the following facts:

  •  There is no federal estate tax and GST tax in 2010 only. However, for taxpayers who die after 2010, the federal estate and GST tax are scheduled to return with a reduced exemption amount of $1,000,000 with an increased maximum tax rate of 55%.
  • The federal gift tax exemption limit of $1,000,000 remains in effect in 2010.
  • There is loss of the “step-up” in basis on capital assets inherited in 2010, (with limited exceptions), which likely will result in additional tax liability and substantial record keeping problems for may more taxpayers.

Given this unexpected status of the Federal Estate Tax Law and the uncertainty as to future modifications, Wills must be reviewed promptly to determine if changes are needed and to maximize flexibility. Funding of “credit shelter” trusts using formulas based on the federal estate tax credit (the traditional approach) will have potentially devastating results for the estates of spouses dying in 2010 because the formulas do not work in 2010 under the current legislation. For example, if a husband with such a will and an estate of $2.0 million dies in 2010, no funds will be placed in the credit shelter trust because no estate tax exemption exists in 2010. Thus, the wife will inherit his entire estate. If she dies in 2011 with $2.0 million in her own assets and the additional $2.0 million inherited from her husband, her estate will pay roughly $1.5 million in taxes that would have been completely avoided under the 2009 estate tax law. The problem gets worse for larger estates.

In order to determine whether your estate plan should be amended, you should review your current Wills to see if the document uses terms such as “marital deduction”, “credit shelter”, “unified credit”, “estate tax exclusion amount” and/or “generation-skipping transfer tax”. Any documents that contain such phrases should be reviewed by an attorney immediately to determine if revisions are warranted. Moreover, if your estate planning documents were drafted prior to 2001, they are most likely out of date and should be reviewed.

Despite the uncertain estate tax climate, we can assist you to add flexibility to your estate plan and protect your estate and your loved ones. For example, one of the favored devices to provide the necessary flexibility in estate tax planning is the use of a disclaimer to trigger creation and funding of a credit shelter trust in the Will. Although this planning opportunity is not for every family, it allows the surviving spouse the opportunity to tax plan within the first nine months of decedent’s death. In any event, your Will should be revised at least by a Codicil to provide for the “What If” scenario (i.e., what if there is no federal estate tax when I die).

Please note that Congress has not yet restricted the use of Grantor Retained Annuity Trusts (“GRATs”), Charitable Remainder Trusts, (“CRTs”), Qualified Personal Residence Trusts (“QPRTs”) or Self-Cancelling Installment Notes (“SCINs”), which offer the taxpayer a creative opportunity to “freeze” the value of assets that exhibit meaningful appreciation potential. These estate planning devices are especially effective at a time when asset values and interest rates remain at the exceptionally low levels. 2010 may be a good year to take advantage of these tax planning techniques.

Finally, please be aware that the State of New Jersey continues to have in full force its own estate tax provision with an exemption level of only $675,000. Planning to avoid New Jersey’s tax remains important.

In light of the foregoing, now it is more important than ever for families to review their estate plans and make changes that would assure their testamentary wishes are accurately reflected and the tax law is taken into account. Please contact one of the attorneys in our Estate Planning Group listed below to discuss how the current legislation will affect you and your loved ones, and what opportunities are available to you to avoid unwanted consequences.

Albert Burstein, Esq.
201-342-6000 x 208
aburstein@hertenburstein.com
Andrew J. Cevasco, Esq.
201-342-6000 x 201
acevasco@hertenburstein.com
Richard Jon Contant, Esq.
201-342-6000 x 237
rcontant@hertenburstein.com 
Louis C. Tomasella, Esq.
201-342-6000 x 206
ltomasella@hertenburstein.com 
Eimi S. Thompson, Esq.
201-342-6000 x 217
ethompson@hertenburstein.com 

We look forward to having the opportunity to discuss these matters with you.