The looming question over the past few years has been, “What will Congress do about estate taxes beyond the 2010 repeal?”  Many predictions have been thrown around.  The more popular one being that the repeal would continue while others felt the exemption level would stay at $3.5 Million.  Now that we’re in 2010, who ended up being right? Nobody it turns out!  Congress has failed to do anything about the estate tax issue and now we are in a carryover basis regime.

As professionals, how do we guide our clients through the uncertain future with regards to their estates?  For your convenience the following is a list of the most compelling concerns. 

1. Potential Disinheritance of Surviving Spouse – The problem is that formula clauses in many trusts say something along the lines of “leave the Exemption amount to the Bypass Trust and Marital Deduction amount to the Marital Trust.” These clauses are now rendered inherently ambiguous as there is no Exemption or Marital Deduction amounts this year.  The result of this ambiguity could be a lawsuit between the surviving spouse and other potential heirs, or even a Petition for Instructions from a wary Trustee. Both would be an undesirable and costly mess.

We have reviewed the formula clauses in the trusts prepared by our office.  We are happy to report that there is no ambiguity regarding the rights of a surviving spouse in those trusts.

2. Application of the Modified Basis Step Up – A step up in basis is now limited to $1.3M for heirs and another $3M of a qualified inheritance for a surviving spouse.  Most estate plans do not specifically address how the step up is to be applied nor does it address how to divide the property in a way that does not disqualify the trust from both the $1.3 M and $3 M basis step up.  We will be contacting our married clients to discuss any necessary changes needed to take advantage of the new basis step up system.

3. Basis Record Keeping – Clients will need to know what their adjusted basis in property is; otherwise the IRS may presume that the basis is zero.  As usual, inadequate documentation may result in unnecessary tax for your clients.

In short, clients need to have their estate plans reviewed.  If you would like to discuss this further, or if you would like to schedule a time for your clients to come and review their estate planning needs with me, please contact my office.  I look forward to assisting you and your clients navigate through these confusing and potentially burdensome laws.  For a more elaborate explanation of 2010 Estate Tax issues, please contact us and we will provide to you.