Even so, if the death tax is imposed retroactively and beneficiaries receive less than they would have under present law, attorneys say that they'll go to court over it if the estate is large enough. Even if Congress allows executors to elect either 2010 law or reinstated rules, that might simply trigger a lawsuit by family members who come out worse under the executor's election. "It's a question of whose ox is getting gored," Brier says.
Planning To Live
Most clients won't pass away in 2010, of course, and they figure they will owe estate tax, as they did in the past. So to a great extent it's business as usual at Oshins & Associates LLC, a Las Vegas estate-law boutique. "We are still using a lot of advanced techniques to save estate taxes and are planning as though Congress may enact a retroactive tax," says Steve Oshins, a firm principal.
Nevertheless, there is no estate tax today, and plans must account for that, too. Some clients may benefit from having their estate-planning documents amended or redrawn during this unusual period. In such cases, the lawyer should build in maximum flexibility, according to attorney Melissa Montgomery-Fitzsimmons, director of wealth planning at First Western Trust Bank in Denver. She says, "The best language is along the lines of, 'If at my death the federal estate tax does not exist or does not apply to my estate, then follow one set of instructions. If the tax does apply to my estate, follow these other instructions."
But we're getting ahead of ourselves. The planning process begins with a formal review of the plan with the client. Brasch says, "The real question is, 'If you die today, does this plan accomplish what you want?' The conversation starts on a non-tax basis."
Once the client has articulated objectives, walk her through her documents. That will reveal any unintended consequences or ambiguities if this year's anomalous rules suddenly had to be applied.
For instance, Montgomery-Fitzsimmons recently helped a woman whose trust agreement read, "Give as much as can pass estate-tax-free to my heirs, and give the rest to charity." With no estate tax this year, charity gets nada if she dies. The client was asked to put a figure on her charitable intent and the $5 million she indicated was then funneled to a private foundation, which yielded an additional benefit because it involved family members in philanthropy.
A more common problem is the divvying up of assets between the marital-deduction and exemption (or "family") trusts. "Based on the laws today, one of the trusts might end up with all the assets," Montgomery-Fitzsimmons says. Someone could get disinherited that way-probably not the client's objective.
Adventures In Basis
Another concern when all the money gets pushed into one pot is the inefficient allocation of the limited basis adjustments now allowed. An executor may step up the basis of any estate assets by a total of $1.3 million, in addition to stepping up by $3 million assets that pass to the surviving spouse, whether outright or in a qualified terminable interest property (QTIP) trust.
If the spouse receives nothing because of an ambiguous will or trust agreement, the marital basis adjustment is lost, and at a cost. After the permitted basis increases have been used, inherited property arrives with the decedent's adjusted basis-in other words, the basis carries over to the heir-forcing inheritors to pay capital gains tax when selling appreciated assets.
Consider the terminally ill man who Kristin Tyler, an associate attorney at Oshins & Associates, recently met with. If the client passes away this year, his trust would send everything to the exemption trust and nothing to the marital-deduction trust. Tyler recommended an amendment to the trust that will pour into the marital-deduction trust the assets the heirs anticipate selling upon his death. Her objective: to give more assets a stepped-up basis and save the beneficiaries capital gains tax.
But this approach could backfire if the heirs later decide not to sell the assets. Passing too much property to the surviving spouse could cause extra estate tax at the survivor's death.