Who’da thunk that we would be almost to April and a bill to re-institute the federal estate tax isn’t even on the radar screens down in Washington? The estates of those dying since January 1 owe no federal estate taxes and there is nothing on the horizon which indicates that this may change soon. In a nation that seems to prefer rich desserts to vegetables, rejoicing over this tax holiday may be a bit premature –and our current estate tax situation certainly carries with it some unintended risks which should be of some concern.
The estate tax has always been a way to provide a substantial source of revenue to fund our government.. In an era of historically huge deficits where the government is doing everything short of scrounging in the couch for spare change, this is a truly strange development. Having an estate tax is a driving force behind wealthy indivuals making large charitable donations and an age-old tool to prevent the concentration of wealth in the hands of a few.
An article in yesterday’s New York Times points out some additional consequences which are now of increasing concern. Most wills drawn over the past generation (which is to say "most wills") provide language aimed at reducing the taxman’s bite by the use of trusts and other devices. The problem is, that these "formula clauses" may end up by disinheriting the very people the wills were set up to benefit! This is because the language often ties the amount to be left in trust to the amount of the federal estate tax credit or exclusion. Since this year there is NO exclusion or credit since there is no tax, the trust may not get funded and the children –or the spouse– may be unintentionally disinherited.
Keep in mind that if our Congress continues to ignore this mess and 2010 ends with no action, the old estate tax with a one million dollar limit will spring back to life and wreak a different kind of havoc on the estate plans of those with exclusions set at recent levels of two million dollars and above. Underlying this all is the issue of how retroactive any tax revisions will be — or whether there will be retroactivity at all.
For those of you who scoff at my suggestion that maybe there will be no retroactivity on the new law, did you ever think we would find ourselves where we are now with an estate tax having expired nearly three months ago and no plans to revive it in sight?