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January 12 2010

Change in Transfer Tax Law

2009 ended without Congress having taken action to change our current transfer tax laws (estate, gift and generation-skipping law). Under current law, estate and generation-skipping taxes are repealed for 2010. While this may sound like a good thing to many, the repeal will only last for one year. Unless Congress takes further action, the tax breaks that led to the one year repeal under the 2001 tax act will end on January 1, 2011 when the estate tax returns with an exemption of only one million dollars. Last year, the estate tax exemption was 3.5 million dollars.

Most estate planners thought that Congress would take action in 2009 to set the exemption between 3.5 and 5.0 million dollars. Most planners did not think that Congress would let the complete repeal occur in 2010 because of the loss of tax revenue at a time when the Country has a very large deficit. Congress may still pass a law in 2010 to put a higher exemption in place before next January. Nevertheless, because the estate tax is such a hot political topic, the future is uncertain.

What this may mean to you and your estate plan depends upon your circumstances, how you will be leaving your estate upon your death, and the value of your estate. If the estate tax exemption is allowed to return to one million dollars next January, it will require many married couples to revise their estate plans. If your plan includes a trust with a formula that allocates trust assets among your spouse and children (or other beneficiaries), the estate tax repeal or the possible return to only a one million dollar exemption may drastically alter or eliminate the amount to be left to your spouse, for example. While we hope that Congress takes action to at least restore the estate tax exemption to its 2009 level of 3.5 million dollars, if it does not, then the failure to plan accordingly may have very harsh consequences to many families.

If you would like to review your situation and discuss whether or not you will need to change your estate plan to avoid estate tax liability that may occur if the exemption drops to one million dollars next January, please call your primary estate planning attorney at Mika Meyers.