Stay On Top of Your Estate Plan in 2010

Last week I wrote about the uncertainty surrounding whether and how the federal estate tax might be extended into 2010 and beyond. As of January 1^st without further legislation being enacted the federal estate tax disappears for one year, only to be replaced with a capital gains tax system that is difficult for lay people to both understand and to comply with.

 It is likely that 2010 brings sweeping changes to the federal estate and gift tax system. The law which we have operated under for the last ten years was originally passed in President Bush’s first term in the White House. By design, that law will sunset at the end of 2010 as the Congress could not get the 60 votes required to make the tax cut permanent for more than ten years.

My experience as an estate planning attorney is that too many clients shove their plans into their safe deposit boxes never to be looked at or reviewed again until someone gets sick – or worse – dies.  Especially in today’s ever changing world it is important to remain vigilant and to review your estate plan on an annual basis.

In the last several years alone, here are a few of the changes that have impacted many estate plans:

In 2005 the federal estate and gift tax system “decoupled” from the state death tax system. In other words, the federal government no longer provides a credit for state death taxes paid. Because the states are looking for more money everywhere they can, many states have lowered their state death tax exemption. This means that when someone’s estate planning documents are not drafted to accommodate this 2005 change, there is a possibility (for decedents who die in a state that imposes a death tax or who have property in such a state) that state death tax will be assessed upon the first spouse’s death – which would obviously impact the surviving spouse;

 In 2005 and in 2006 there were many changes impacting the way that IRA and 401(k) accounts are taxed and required to be distributed after the death of the account owner. Actually, the laws here can work to the beneficiaries’ benefit – allowing them greater leeway in achieving continued tax deferred growth. The pension plan laws are ever changing, and these assets are among the toughest to plan for as one wrong move could result in the recognition of the previously untaxed income. A beneficiary who is unaware of the complex rules surrounding IRA and 401(k) accounts can easily fall into a trap resulting in thousands (if not more) of income tax liability;

In 2007 the Florida Trust Code changed in its entirety.  The law is, for the most part, better than the law we had before. Nevertheless, the law is completely different than what it was. Even if you have Florida trusts, if they haven’t been updated to take into consideration the various elements of this new law, you should visit with your estate planning attorney;

Now in 2009/2010 we have other big changes with the federal estate tax laws. Depending upon what the Congress decides to do and the President agrees to sign, trusts may need updated tax language. Moreover, which assets you’ve put into your respective trust may need to change. Many married couples “balance” their trusts by putting some into husband’s and some into wife’s trust. To the extent that the tax laws change, rebalancing the assets that you’ve decided to place into each spouse’s trust might be necessary.

A final change that occurs is not due to any law change; rather it has to do with changes to your residence. If you own a Florida residence and declare it as your Florida homestead, at that point in time (the declaration as Florida homestead) very specific rules regarding how it can be left to your beneficiaries come into play. Those same rules didn’t apply the minute before you became a Florida resident. That’s another big change that can affect an estate plan.

2010 is likely to be a year of change. Let’s hope it’s for the better. But in any event, don’t lock your estate planning documents in a drawer and forget about them. Now more than ever you should dust them off and discuss them with your estate planning counsel.

©2009 Craig R. Hersch

Posted: 1/4/2010   By: Craig R. Hersch    Comments (0)