New law poses challenges for estate planners

While most people welcome the 2010 repeal of the federal estate tax, there is a little-known catch to the legislation. Here is an overview of the new “catch” in the law (the so-called modified carry-over basis):
  • Estates of decedents dying in 2010 are able to step up the basis of assets transferred, but only to a $1.3 million limit.
  • The basis of property transferred to a surviving spouse may be increased by an additional $3 million, or $4.3 million in total.
  • The basis may never be adjusted above its fair market value on the date of the decedent’s death.
  • The executor elects which assets receive an increase in basis and the extent to which each asset is adjusted for each beneficiary.

It is likely that Congress may still repeal the 2001 legislation creating this new modified carry-over basis regime. However, Congress is also very busy with other pressing matters and previous attempts at change have failed. It is important to understand and operate under the tax laws as they are written today and anticipate that the easiest path is for Congress is to simply do nothing.

In the meantime:
Carefully review your will and/or revocable living trust agreement for any such structural or definitional issues and, if necessary, consult with an estate planning attorney or accountant. In many cases, the formula language should be revised to better define taxpayers’ intentions regarding dividing the estate if death occurs when no federal estate or generation skipping transfer tax is in place.
You should revise your wills to provide flexibility, where appropriate, for an executor, trustee or personal representative to allocate basis adjustments under the new carryover basis regime.
For those of you still able to make substantial gifts this year, you should do so now – preferably as early as possible.
If someone in your family is terminally ill, strongly consider planning techniques involving “deathbed” transfers of assets between spouses so the decedent can take full advantage of the new basis step-up rules. Remember, the old rules no longer apply in 2010. In Wisconsin, because of the way the marital property laws used to fit with the federal tax law, it is particularly critical.

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