In 2001, Congress passed significant tax legislation that would gradually increase the estate tax exclusion, leading to the repeal of the estate tax in 2010. To make the fiscal impact seem less, the Republicans crafted the legislation so that the repeal would only last one year, and the pre-2001 tax laws would become reinstated in 2011. The Republicans intended to eventually make the estate tax repeal permanent, and the Democrats assumed they would stop the madness within the nine years before the estate tax actually got repealed. Not too many people would have guessed that all attempts to change the estate tax permanently — either by repeal or by fixing a significant exclusion that would continue indefinitely — would have failed by December 31, 2009. The unthinkable has happened. We enter into 2010 with no estate tax in place.
With a twisted sense of humor, some commentators have decided that 2010 is the year to arrange a convenient death for aging loved ones with large estates. I suspect that there are some wealthy folks that may need to re-think the designation of the persons who have the right to “pull the plug”, and others may even need to engage bodyguards and hire additional security.
Seriously speaking, many estate plans never contemplated that the estate tax would be repealed, and there there may be unintended consequences. Everyone whose will or trust has any type of estate tax planning language in it needs to review it immediately to make sure that the documents include a provision that deals with the possible scenario where there is no estate tax. The unintended consequences may be less radical for married couples in community property states whose estates consist primarily of community property, and there may not be much problem if both spouses have common beneficiaries. On the other hand, a surviving spouse may get nothing if children from a prior marriage are entitled to the “maximum amount that can pass tax free”. Because the children can get everything tax free, there is nothing left for the spouse to get.
Congress is expected to”fix” things after the first of the year, and many expect the changes to be retroactive. A retroactive change to gift and estate tax laws has happened previously. When I say that “Congress is expected” to do anything, I realize that I expected Congress to have adopted something to “fix” things long before now. No one really knows what is going to happen. Fixing the estate tax laws is obviously not a high priority for those presently in charge (especially in the Senate), and only time will tell what will really happen.