April, 2010
By Gary Pittsford, CFP®
President and CEO, Castle Wealth Advisors, LLC

In our February Financial Concepts we talked about four areas that you need to think about where estate planning tax laws are concerned, the first two of which are discussed more in-depth in this article:

  • Estate tax laws
  • Trust document wording
  • Step-up in basis on assets
  • State inheritance tax laws

Congress talked in 2009 about extending the estate tax law that was then in effect, but they ran out of time and did not pass a new law. Possibilities to consider as a result:

  • Congress may do nothing and allow the law which is in force today to continue. That means that there would be no estate taxes in 2010, the exemption for 2011 would be only $1 million and the estate tax rate would be 55% over $1 million.
  • Congress, sometime this year, may pass a bill re-establishing the 2009 $3.5 million exemption and a rate of 45% for each person, and make it retroactive for all of 2010 and for the next several years.
  • Congress may pass a completely different type of estate tax law, which may increase the exemption closer to $5 million or choose a completely different level of exemption. We will continue to watch what is happening in Washington.

While we are waiting to see what type of estate tax law congress may pass, what should we be doing now?

Most of you have trust documents that provide for a Credit Shelter Trust and a Marital Trust. The language that your attorney put into your trust was based on the law in the year that you signed it. Typically, your Credit Shelter Trust would receive the maximum amount, which can pass free of tax. For anyone who passes away this year, that means that 100% of assets in their trust would pass to the Credit Shelter Trust and none would pass to the Marital Trust. Obviously this was not what most people wanted to happen when they initially prepared these documents.

For those of you who are married and have children from more than one marriage, your trust document might indicate that the maximum amount of assets could pass to your children tax free and the remaining assets would remain in the trust for the surviving spouse. This could be a problem for 2010.

For those of you who are not married, your trust document may indicate that the maximum amount of assets equal to the estate tax exemption would pass to your children and the remaining assets would go to your favorite list of charities. This may also be a problem this year.

Under both of these scenarios, 100% of your assets would go to your children and nothing to your surviving spouse/charity. Here again, this was probably not your original intent. To avoid these potential problems, everyone needs to review the language in their documents. For some of you, making changes this year would be a good idea, and for others waiting to see what happens may be okay.

We also need to consider other estate planning and asset transfer ideas. You need to know which assets are in joint name or individual name. You need to know the beneficiary that you have designated for any pension plans, IRAs, 401(k)s, life insurance policies and annuities, as these assets are not controlled by your will and trust documents.

To conclude the estate tax series, I will cover the problems that we have with step-up in basis on all assets and the possible problems of much higher state inheritance taxes (depending upon what state you live in) in our next two articles.

Gary Pittsford, CFP®, is President and CEO of Castle Wealth Advisors, LLC. Castle specializes in helping families and closely held business owners with valuations, succession planning, estate and income tax analysis and retirement income security. Castle’s senior partners work with clients throughout the country in making logical decisions that help them fulfill their personal and business financial goals. For more information visit www.Castle3.com, call 1-888-849-9559 or e-mail Gary directly at .