The Tax Relief Act of 2010: Three Estate Planning Themes

My high school English teacher could never get me to find the themes of The Great Gatsby or The Red Badge of Courage (or anything else we read, for that matter), but apparently I am enough of a tax geek to see themes in the estate tax provisions of the Tax Relief Act of 2010.

The first theme is income tax planning matters. When I am representing the estate of a person who died in 2010, does the estate pay the estate tax and get the step up in basis to avoid income tax, or does the estate opt out of paying estate tax and get the modified carryover basis and potentially pay more income tax? If the estate opts out, which beneficiary gets the assets with the step up? That analysis begins to look a lot like the division of assets in a divorce; a dollar of cash isn’t worth a dollar in an IRA. If the estate opts out, the estate needs to review the formula clause to see if it can even fund the Credit Shelter Trust since it didn’t need to put any assets there in order to eliminate the estate tax.

That leads to the second theme; professional fiduciaries. The inexperienced fiduciary might make the wrong call; for that matter, might not even recognize that a call needs to be made. What about the election in 2011 to prepare an estate tax return and preserve deceased spousal unused exclusion amount? What if no estate tax return is filed because the decedent had a modest estate, but then the surviving spouse hits the Powerball Lottery? What if we fund the Credit Shelter Trust in 2011 or 2012 and then there is no estate tax when the surviving spouse dies…will we then wish that those assets were included in the surviving spouse’s estate so that we get a step up in basis at the second death? Could we have added language to the Credit Shelter Trust giving an independent trustee the ability to distribute assets to the surviving spouse in an effort to receive step up at the spouse’s death?

Here are some additional thoughts. Since the 2010 GST tax rate is zero, shouldn’t the estate elect out of the automatic allocation rules? A last minute decision to file a Form 8939 could result in an unhappy beneficiary who gets stuck with a larger than expected income tax bill and who is looking for someone’s malpractice carrier. Speaking of unhappy beneficiaries, saving a few dollars by not filing a Form 706 could result in an additional $1,750,000 in estate tax when the surviving spouse dies.

Which leads to the third theme…the estate planning game is not for the occasional player who might not think about the issues raised in this post.