REVIEW YOUR WILLS AND ESTATE PLANS!

Posted by Thomas J. Bogar on October 28, 2009

Next year the federal estate tax is supposed to lapse and then return again in 2011.  Beltway insiders doubt Congress will allow that to happen and expect that before the year’s end, Congress will extend the current system through next year.  Currently, the federal estate tax exemption is $3.5 million per individual (and $7 million per couple). 

Before the Bush tax cuts of 2001, the federal estate tax exemption was $675,000/person.  For anyone with assets over this amount, estate planning attorneys drafted credit shelter trusts for each spouse, allowing each spouse to take advantage of the full tax exemption.  What this means is that when the first spouse dies, some assets would go into a credit shelter trust created for the beneficiaries that may or may not include the surviving spouse.  The balance of the assets would pass to the surviving spouse (either outright or in trust), free of federal estate taxes.  The assets in the credit shelter trust would remain free from federal estate taxes as well when the second spouse dies. 

However, many wills drafted before 2001 (when the federal estate tax exemption remained constant for many years) direct that the entire or full amount of the federal estate tax exemption be used to fund the credit shelter trust.  Since individual net worth has correspondingly declined with the real estate and stock markets, net estates once valued at the exemption amount now are worth less, particularly when the exemption amount has increased significantly since 2001.  As a result, on the death of the first spouse, everything could end up in the credit shelter trust with nothing left to the surviving spouse.  If the surviving spouse is not the beneficiary of the credit shelter trust, the unanticipated consequences could be horrific. 

Bottom line:   Your wills and estate plans  should be reviewed, particularly now when the estate tax exemptions remain in flux.