Update for 2010


2010 has been the year estate planning attorneys never expected.  We expected Congress would act responsibly to deal with the scheduled expiration of the estate and transfer tax for one year, and its return under 2001 terms on January 1, 2011.  Yet, here we are with less than a month to go, and Congress is in a lame duck session with numerous hard issues that must be decided.  It does not seem likely that Congress will act to reinstate the estate tax exemption at the 2009 level of $3.5 million per person.  Without legislative action, taxpayers who die with assets in excess of about $1 million will face an estate tax liability of up to 55%.

Estates of those who die in 2010 are not be subject to estate tax, but they also are not blessed with the old “stepped-up basis” by which assets beneficiaries inherited were valued as of the date of death.  In 2010, inherited assets transfer at the decedent’s basis, after application of a limited allowance to “step up” to the date of death value.  That amount is $1.3 million for assets passing to heirs where there is no surviving spouse.  If there is a surviving spouse, there is an additional allocation of $3 million.  The Personal Representative of the estate must make the allocation by the date the decedent’s final income tax is due.  According to the tax laws, the assets of the estate must be listed in full, with the decedent’s basis.  IRS has not completed the form to be used for the 2010 tax return, nor provided any interim guidance.

Whether the estate tax returns at the 2001 level or the 2009 level, there is some basic estate planning all should consider as fundamental:

  • Durable Power of Attorney allowing your designated Agent to handle your financial affairs if you are unable to do so.
  • Healthcare directives including:
    • Living Will in which you state your preference for the medical care you want if you are unable to speak for yourself.  This includes end-of-life care as well as care in case of a catastrophic accident.
    • Health care Power of Attorney in which you designate the agent who will make decisions on your behalf if you cannot.
    • HIPAA privacy authorization to designate who should have access to your medical records and who your care providers may discuss your condition. 
  • Will or Revocable Living Trust to state how you want the assets of your estate distributed. 
  • Parents of minor children should make provisions for naming a guardian should neither parent be available.  Guardians should be named in the Durable Power of Attorney to cover a parent’s incapacity, and in the Will for guardianship after the parent’s death. 
  • Supplemental or Special Needs Trust for benefit of a disabled child or adult under the age of 65, to preserve their ability to receive government funding such as social security disability insurance.
  • Retirement Trust to manage IRAs, 401(k)s and other retirement assets inherited from a decedent.  This is particularly important for retirement assets inherited by minor children.