ElderLaw News

ElderLaw News is a weekly e-newsletter that brings you reports of legal developments and other trends of vital interest to seniors and their advocates. This newsletter is brought to you by The Estate Planning & Elder Law Firm, P.C., William S. Fralin, Esq., President.

No Estate Tax Means Extra, and Different, Planning

by Andrew Hook and Michael Graham

The good news, one might say, is that 2010 represents a one-year repeal of the federal estate tax. Moreover, the gift tax rate for 2010 has dropped to 35% (from 45%). Finally, the federal generation skipping transfer (GST) tax, which has been an additional tax that could push the tax rate on gifts to grandchildren to the 70% range, is also repealed.

Why isn't there dancing in the streets? Read on. In summary, the changes and issues described below are so dramatic and so different from prior law, that we are recommending that all clients have their wills and revocable trusts, if applicable, reviewed to determine whether these estate planning documents need to be revised in order to avoid tax loss and confusion. Why?

First, for 2010 a new system called "carry over basis" (COB) means that many who would have paid no tax will now be paying capital gains tax when they sell inherited assets, while still searching for records to show how much these parents or grandparents paid for those shares, this gold, or that home. We all expect that capital gain tax rates will increase dramatically over the coming years.

Second, the 2010 repeal was unexpected (Both Republicans and Democrats introduced legislation to stop the repeal.) and many wills and trusts should be amended to take advantage of up to $4.3 million in "free additional basis" for inherited assets. The 2010 law provides $1.3 million in basis adjustment for all estates and potentially another $3 million of basis adjustment for a married person, but only with the right will or trust provisions.

Third, and perhaps most importantly, virtually every tax sensitive will or trust written since 1982, and many written before then, uses words and formulas based upon the federal estate and GST tax systems. Those tax systems do not exist in 2010. It is a little like referring to "the property tax laws of the Soviet Union." While logic tells us to pretend they still exist when reading those old wills and revocable trust agreements, the potential conflicts between descendants, often of a prior marriage, surviving spouses, and the Internal Revenue Service, which will surely support the most tax expensive possible reading, are sure to arise. This puts the taxes and the assets themselves at risk.

While it is possible that Congress will reconvene in 2010 and retroactively repeal the repeal (remember that they are from the government and they are here to help us), these are exactly the same people in Congress who were unable to agree on this subject in December of 2009. Those who oppose estate tax in any form are even more unlikely to negotiate once they have tasted "estate tax freedom."

It is also worth remembering that the federal estate and GST taxes automatically reinstate themselves in 2011 with higher rates and lower exemptions than in 2009. While too complex to address in this article, if a person is domiciled in a state other than Virginia, and if that other state has a state death tax, or if a Virginian owns real property or tangible personal property, like art, in such a state, even more document revisions are required.

What should you do? We recommend two actions.

First, we recommend that all clients review their wills and trusts with their estate planning advisors to see whether new language should be included to: (i) clarify tax based formulas for 2010, and (ii) add tax formulas to take advantage of the exceptions in 2010 to COB, thus reducing future capital gains tax, and to compensate, in 2011 and thereafter, for lower estate tax exemptions ($1 million instead of $3.5 million).

Second, we recommend that all clients begin a concerted effort to collect and record the ownership and other tax basis information for every single asset they own. This includes residences, stocks, bonds, and other investments, art and collectibles, that is, everything. This information may save your beneficiaries substantial time and money.


If you are interested in having an Elder Law attorney from The Estate Planning & Elder Law Firm, P.C. speak at an event, then please call us at:

Maryland (301) 214-2229
Virginia (703) 243-3200
Washington DC (202) 223-0270

The Estate Planning & Elder Law Firm, P.C.

The Estate Planning & Elder Law Firm, P.C. is an elder law firm. We represent older persons, disabled persons, their families, and their advocates. The practice of elder law includes estate planning, estate and trust administration, powers of attorney, advance medical directives, titling of assets and designations of beneficiaries, guardianships, conservatorships, and public entitlements such as Medicaid, Medicare, Social Security, and SSI, disability planning, income tax planning and preparation, care management, and fiduciary services. For more information about The Estate Planning & Elder Law Firm, P.C., please visit our website at http://www.chroniccareadvocacy.com.

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This newsletter is not intended as a substitute for legal counsel. While every precaution has been taken to make this newsletter accurate, we assume no responsibility for errors, omissions, or damages resulting from the use of the information in this newsletter. The Estate Planning & Elder Law Firm, P.C. thanks the law firm of Hook Law Center for their input to this newsletter.

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