Where'd the Estate Tax Go?

Under the Bush administration's reign, the Federal estate tax exemption soared - in 2009, up to $3.5 million of a single person's estate ($7 million combined for a married couple) was exempt from the estate tax. However, under the Code, the estate tax was set to expire as of 2010 - i.e., as of New Years Day 2010, the estate tax has been repealed in its entirety. This means that if one were to die today, January 6, 2010, no matter if their gross estate is valued at 20 bucks or 20 million bucks, the decedent's estate would not technically be subject to any estate tax under the law as it exists at this moment.

For those advocating the death of the estate tax, this is wonderful -- however, it could cause problems for some. For example, persons with a so-called "bypass trust" in place (i.e., "I want the amount that will not create any federal estate tax to go to my kids; I want everything else to go to my spouse") may have problems having their last wishes play out as intended, unless their estate planning documents are revisited. Also, the repeal of the estate tax means the scaling back of an important tax break: the step-up in cost basis.

Of course, Congress is indicating that when it returns to work next month, a retroactive "fix" will be passed. But is this fair? Last time I checked, the Constitution (see Article 1, Sections 9 and 10) prohibited ex post facto legislation. However, the Supreme Court unanimously ruled in a 1994 opinion (United States v. Carlton) that retroactive tax laws did not violate the Constitutional prohibition on ex post facto legislation, provided their retroactive application was "supported by a legitimate legislative purpose furthered by rational means." What a [conveniently] vague standard. Even if Congress does not pass retroactive legislation in the next couple of months, the estate tax may come back with a vengeance in 2011.

What will happen with the estate tax remains to be seen, but in the meantime, persons with bypass trusts in place and those whose assets have more than $1.3 million worth of appreciation should consult their estate planner during this uncertain time. For more information, feel free to contact me at (858)551-2440.