In one way, this has been a sweet year for anyone lucky enough to inherit money. The one-year repeal of the federal estate tax means that heirs can receive their windfall without paying anything to Uncle Sam.
Next year, pending any congressional changes, the tax-exempt amount will go down to $1 million—from 2009’s level of $3.5 million—with estates paying rates of up to 60 percent on amounts above that. The tax rate in 2009 was 45 percent.
What seems straightforward—a year of no federal estate taxes—is actually complicated.
“Clients come in quite mystified,” says Leigh-Alexandra Basha, chair of the international private-wealth group at Holland & Knight. “They don’t even know the questions to ask.”
Many estate plans are written in a way that assumes there is an estate tax, using wording such as “I leave to my surviving spouse the minimum amount necessary to produce no estate tax.” This year, that means that the surviving spouse could be left with no money, says attorney Ronald Aucutt, a partner at McGuireWoods.
“We have seen cases in our firm, but nothing litigated yet and no situations that are public,” Aucutt says. “It is likely this situation has occurred many times throughout the country this year.”
Wills that leave “the maximum amount that can pass free of estate tax” to children this year translate to giving them everything. “You could have the spouse getting everything or nothing very easily,” says Aucutt. “When the spouse is not the parent of the children, this gets terribly awkward, and there’s only so much that can be done about it after death.”
The District and Maryland have their own estate taxes this year, and all three local jurisdictions, including Virginia, have passed or are considering legislation to help people interpret clauses that reference the law as it was written prior to this year.
Before death, though, a lot can be done. James E. McNair, senior tax partner for Patton Boggs, has been helping clients shift assets from healthy to unhealthy spouses; if the unhealthy one passes away this year, that person will die holding much of the family assets, which can then be left in a trust for the surviving spouse, avoiding the federal estate tax indefinitely. If the unhealthy spouse survives into 2011, he or she can reverse that paperwork.
Says McNair: “We’ve had situations where we unwound years of estate planning to take advantage of this year of repeal.”
This article first appeared in the November 2010 issue of The Washingtonian.